What is an emergency fund?
Sometimes called a rainy-day savings, an emergency savings is money that you set aside to serve as your financial safety net for when you need it.
Maybe your car breaks down. Maybe you get pneumonia. Maybe you lose your job. When unexpected expenses arise, a rainy day fund is a helpful safeguard to help you avoid debt or to take on more debt
Should you pay down the debt before you start saving?
The short answer: it’s a balancing act. One of the best moves you can make as you work your way out of debt is to make choices now that set you up for success in the future. It’s possible that an unexpected expense is what got you into debt in the first place.
The key is to balance your savings while paying off debt. A budget app like Nimbl can help you strike the right balance by helping you to understand your current debt situation and help you to put together a customized budget and debt plan.
How much should you have in emergency savings?
Some experts recommend that you set aside enough money to cover six to 12 months of living expenses. While that’s a good goal, it may not be realistic. Begin by saving enough to cover one month of expenses. Then, save enough to cover three months of living expenses. Don’t know how much to save? Follow these tips below to calculate your emergency fund amount.
Step 1. Add up monthly living expenses
Start by understanding how much your expenses are in a typical month. Add up all of your recurring costs (housing, loan payments, etc.) along with incidentals (gas and groceries). Don’t know all of these expenses off the top of your head? The Nimbl app can help by giving you an accurate view of your monthly expenses and your current financial situation.
Step 2. Multiply by 3
Multiply the monthly expenses you just determined by three. This will total to three months’ worth of expenses – the minimum amount you should aim to save.
Step 3. Optional: Calculate three months of wages
Calculate three months of wages and set that as your goal. The disadvantage of this method is that if you’re already in debt, it may not give you a high enough goal to work toward.
Saving in smaller amounts is better than not saving at all
The key is consistency. Even a small amount of money adds up over time. We recommend setting up a recurring transfer to a dedicated savings account. Having the amount taken out of your paycheck can help remove the temptation to spend the money. As the saying goes, “out of sight, out of mind.”
To determine the amount you should set aside each paycheck, some simple math is involved.
Let’s say you’re trying to save $12,000 and you get paid twice per month. If you’re able to stash away $250 per paycheck, it’ll take you two years to reach this goal. If you can save only $100 per paycheck, it’ll take five years.
Play around with the numbers until you find a solution that works for your timeline — and your budget.
When should you start an emergency fund?
The answer to this one is easy: Start now. Find out how Nimbl can help you find the path toward financial freedom.