Emergency Fund Why is it advisable to always have money set aside for unforeseen events

Setting aside an “emergency fund” or “rainy day fund” is a good idea to avoid future worries. Many of us live on less than a month’s salary, but building a financial cushion is essential to staying on track with our budget goals and avoiding risky debt. But how much should we save, and how should we do it? Let’s find out together!

An emergency fund is a financial safety net you can fall back on in case of an emergency. Instead of relying on your overdraft or having to borrow money to get out of a bind, you can draw on this cash reserve without further straining the rest of your finances. 

An emergency fund should only be used in the event of truly unexpected events that require your immediate intervention and sudden payment. For example:

• sudden loss of employment and source of income;
• exceptional medical expenses;
• economic recession resulting in a significant loss of income;
• unexpected move.

While the circumstances that justify using your savings may not be as important, this fund can also be used for “rainy days” to cover life’s small, unexpected expenses. These one-off expenses include situations such as:

• the purchase of a new refrigerator in the event of a breakdown;
• vet bills if your cat needs treatment;
• car repairs;
• buying a new phone in case of theft.

Setting aside money when you can to avoid unexpected emergencies can be likened to investing in a future crisis. In the event of a crisis, no matter how severe, this will give you a little more flexibility in managing your finances. To get ahead and have peace of mind about your finances, it’s best to put money aside as frequently as you can, and at least once a month if possible, to maintain a good flow in your cash flow. 

Having a rainy day fund is invaluable, even if the amount may not seem like much at first. Here are a few reasons why: You will reduce your stress because you will know that you have a financial safety net.

• You will become more forward-thinking by preparing for the future and avoiding making rash financial decisions in the present.
• An emergency fund also allows you to avoid dipping into other savings accounts when a crisis hits, and to stay on track with all your budgeting and savings goals.

Experts estimate that an emergency fund should cover approximately three to six months of fixed monthly living expenses (including rent, insurance, gas, and electricity bills). While some choose to also include their variable expenses (groceries, outings, and entertainment) in the emergency fund budget, it’s more common to ensure you have up to six months of fixed expenses saved.

Whether you decide to save to cover three or six months of your fixed expenses obviously depends on your means and current lifestyle, and even the configuration of your household. For single-person households whose income varies from month to month, as is often the case for the self-employed, it’s safer to have six months’ worth of savings. Indeed, their financial safety net may be a little more fragile than that of a two-person household, for which the other person can provide financial support in times of difficulty, or those with a more regular source of income. 

To deal with life’s smaller emergencies, especially in the short term, you can plan for smaller savings, but this depends on your personal situation. Estimates range from €500 to €2,500, but whenever possible, it’s wise to set aside at least €1,000. Keep in mind that while €1,000 should be enough to cover expenses such as replacing a household appliance or paying an unexpected bill, it may not cover both. Of course, save at your own pace and within your means. If you’re a little tight this month, you can try adjusting your habits to put a little more money aside next month. 

A good way to assess how much to set aside for a rainy day is to take stock of your current situation and then try to predict your future expenses. This will help you get a better idea of ​​your goal: saving €500 or more. These contingencies might include: 

• the cost of repairing a car that tends to break down; 
• visits to the vet if you have an older pet; 
• dental consultations if you often have dental problems; 
• Assess the age and functionality of your essential devices, especially those no longer covered by a warranty.

Once you have a better understanding of your potential small unexpected expenses, it’s easier to estimate how much to set aside in your rainy day fund and better prepare for them.

It’s easier to set aside money for possible short-term needs. By saving at your own pace to create a reserve for life’s little unexpected events, you’ll gradually train yourself to save for the medium to long term.

Setting up and maintaining an emergency fund may seem daunting at first, but if you follow these tips, it’s actually quite easy. By planning the amount of money you want to save in your monthly budget, saving will become easier and may even become a habit. Here are our step-by-step tips.

The first step in buildishort-termshort-, medium-term, or long-term emergency fund is to develop a solid budget. By following these steps, you’ll be well on your way to saving more easily:

1. Track your spending for 30 days, recording all your income and expenses.
2. Separate your fixed costs from your variable costs. Your fixed costs are all the essential expenses (rent, debt payments, car insurance), while your variable costs are more flexible (groceries, going out, gym membership).
3. Determine what percentage of your variable costs you could use each month for your emergency fund. For example, if you earn €3,000 per month and your fixed costs are €2,000 per month, you will have €1,000 left in variable costs per month. Of this amount, you could decide to save 25%, or €250 per month. By the end of the year, you will have saved €2,500, which will be a good start for your emergency fund for short-term emergencies.

It’s important not to get discouraged, even if saving requires effort or if your goal seems too big. Even small savings are important: for example, if you manage to save €30 per week, that will still amount to €1,440 per year, which is already quite a lot! Since emergencies are unforeseen, they can arise tomorrow or in ten years. If you continued to save €30 per week for ten years, you would have an impressive financial cushion of €14,400 in case of a crisis!

Once you’ve established your budget, it might be a good idea to automate the funding of your emergency fund. This involves scheduling an automatic transfer each month from your current account to your savings account or an N26 sub-account using automatic rule, so you don’t have to think about it and are less tempted to spend. 

BBeingflexible with your budget, given the inevitable fluctuations in your income and expenses, is essential for staying motivated. Check each month to see if the amount you’ve budgeted can actually be put into your emergency fund. In some cases, you might even save more than you expected! 

Perhaps the best part of saving money regularly is rewarding yourself for each milestone you reach. For example, let’s say your goal is to create a $6,000 emergency fund. Every $1,000 you save could be a treat to a movie or a special dinner. This will motivate you to reach your savings goals.

Your emergency fund should be kept in a place that’s easily accessible in case of a crisis. An online bank with a debit card is ideal because you can easily withdraw money from anywhere. It’s also important to keep your emergency fund separate from your regular checking or savings account so you’re not tempted to spend it. 

As with all things worthwhile, getting started is often the hardest part. Yet, saving money can sometimes be easier than you think. If you’re struggling to make your rainy-day savings goals a reality, here are some tips to free up some cash and give yourself a head start:

• Directly place a portion of your professional bonuses, reimbursements o, or money you received as a gift into your emergency fund;
• Declutter your home while earning money by reselling all your unwanted items or clothes online.
• Depending on your situation, you might consider working a few extra hours and using the money earned to boost your emergency fund. 
• Try going a month without shopping or set aside one day a week where you don’t buy anything (not including necessary fixed costs, of course!).