Chapter 2. Create an Emergency Fund

Now that you've created a budget, let's move on to step two of the ladder to financial wellness, Creating an Emergency Fund. In addition to saving for your short- and long-term financial goals, it's important to save for emergencies. Everyone will experience a major unexpected expense at some point in life. A car repair bill, a family emergency, or a sudden loss of income each poses a significant financial challenge, but having an emergency fund can be the difference between that expense being life-changing or only a small inconvenience. The rule of thumb is to save at least three months of living expenses, so you have money readily available to absorb unexpected financial shock. 

 

 

Living expenses are defined as your monthly minimum expenses. These are the absolutely essential expenses like money for rent, utilities, and groceries -- the expenses you cannot live without. Think back to when we discussed the process for budgeting in the last chapter. We recommended separating your expenses into two lists: needs and wants. That "want list" isn't factored into your monthly minimum, so if you do find yourself in financial hardship the wants are going to be the first things to go. Having a budget helps you know which expenses you can cut out in case of an emergency.

 

Practice

Now that you know how to create an emergency fund, think of paying it forward and discussing it with a friend or a family member.

 

Congratulations! You can move on to Chapter 3. Consider your Credit and Debt

To review the full module on Financial Literacy Overview (FLO), click here. 

 

This was made possible in partnership with The Singleton Foundation for Financial Literacy and Entrepreneurship. This video and more videos like this can be found on Millionstories.com Links to an external site..