An emergency fund prepares you for unexpected expenses. An emergency fund keeps you from borrowing money from friends and family. ... They can keep you from borrowing money from friends and family. They help you prepare for unexpected expenses.
Unexpected expenses are those expenses you did not see coming. An example would be going for your inspection of your car and not passing because there is something that must be repaired. This is something that can be included in your budget as part of your savings plan.
How to Avoid Unexpected Expenses
5 ways to budget for unexpected costs
While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.
There are three major types of expenses we all pay: fixed, variable, and periodic.
An expense is the cost of operations that a company incurs to generate revenue. As the popular saying goes, “it costs money to make money.” Common expenses include payments to suppliers, employee wages, factory leases, and equipment depreciation.
Emergency Fund Examples
Aim for three to six months of expenses—but think it through. The rule of thumb is that you should try to have three to six months of expenses in your emergency savings, but you may need more or less, depending on your circumstances.
When you are budgeting and saving, the money in your emergency fund should be earmarked for unexpected expenses. ... Once you understand what unexpected expenses actually are, you will be better able to plan your savings and manage your budget.
That said, the rule of thumb is to save 15% - 20% of your income. Most of this (half to three-quarters) should be set aside for retirement accounts like an ISA or pension. And the remaining savings should go towards building an emergency fund, paying off debt and other financial goals.
Standard financial advice says you should aim for three to six months' worth of essential expenses, kept in some combination of high-yield savings accounts and shorter-term CDs.
At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items. This is called the 50/30/20 rule of thumb, and it provides a quick and easy way for you to budget your money.
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