I never realized how close to the edge I lived.

News stories would come to my attention with numbers like 66% of Americans live paycheck to paycheck. I would scoff at those people. I always had money in the bank an the end of the month. I wasn’t like them — until I realized I was.

I had a £1,000 ‘emergency’ fund and a couple of hundred pounds in my debit account. But my expenses were at least £1,600 and my monthly take-home pay was £1,800. The math told me I couldn’t last one month if my salary disappeared.

I lived paycheck to paycheck without knowing it.

Building up an emergency fund is an essential part of personal finance. It’s the buffer that allows you to run into short-term problems without catastrophe. Without an emergency fund, you are completely dependent on your employer and any unexpected expenses can derail your financial life.

The crazy survivalists understand the perils of depending on others: they stockpile months worth of food and supplies. If the flu strikes again, they don’t need the local supermarket for food, or the power company for electricity.

An emergency fund accomplishes the same thing: it diminishes the effect that the external world can have on you. It increases your freedom and your options,

How big of an emergency fund is necessary? Dave Ramsey, along with other financial experts recommend three to six months of expenses. If you have ultra-secure work, three months is fine. If your job is more risky, lean toward six months.

There is also psychological benefit to having a well-stocked emergency fund: less stress. An emergency fund is a financial shock absorber, it frees you from having to watch out for every bump in the road. If your boiler breaks or there is an unexpected medical expense, you don’t have to panic about where the money is going to come from, and you don’t need to use a credit card.

Cut your expense and try to build up your emergency fund today.

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Header photograph by Paul Keleher

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