How fragile are our finances?
Emergency savings – sometimes known as a “rainy day” fund – is a cornerstone of personal finance. The eZonomics story How fragile are our finances? tells how an academic paper found half of people in the United States could not pay a similarly-sized unexpected bill of $2,000 in 30 days – a proportion it described as “disturbingly high”. In Germany, it found 51% would have trouble raising the funds and in the United Kingdom 52%. It highlights the importance of building an emergency fund to meet unexpected costs.
My boiler broke – it’s a financial emergency
An unexpected bill of €2,000 could arise for a major car repair or if a large household appliance breaks down. Emergency funds can also be used to cover regular expenses for a period if an individual’s work hours are cut or they lose their job. Personal finance experts often recommend building an emergency savings fund of between three and six months of wages – with the exact size determined by circumstances, such as the number of dependents or size of debt.
Save often to build the habit
The video tutorial How much should I be saving? outlines how to set up a personal budget and build an emergency fund.
It suggests setting up an automatic payment to put savings aside at the start of the pay cycle. It says that adding just a modest amount to an emergency fund on a regular basis is worth it. “The important thing is to get started and get into the habit of saving.”