What Is An Emergency Fund?

Have you ever found yourself in a pickle where an unexpected expense has occurred? From major car fixes to home repairs to a surprising job loss, life can throw curveballs you weren’t expecting. You can knock them out of the park and be more prepared with an emergency fund.

What Is It?

According to the Federal Reserve, approximately, only about half of Americans have some type of rainy day fund that can cover 3 months’ worth of expenses. An emergency fund is an account (generally with a financial institution) that has money set aside for unforeseen circumstances. The money set aside can help when something unexpected happens and protects you from taking on too much debt.

• If you don’t currently have an emergency fund, make a goal to save up $1,000. You can call this your starter fund. It’s not a fully funded emergency fund to protect you from too much debt, but it helps cover unexpected expenses and builds your savings skills. Once you get to $1,000, saving more should be a breeze!
• A fully funded emergency fund should cover 3-6 months of expenses. This way, if you lose your job at any point, you will have peace of mind knowing your bills can be paid while you search for your next job.

Importance Of An Emergency Fund

To determine if you need an emergency fund, ask yourself these questions:

• If your car broke down tomorrow, could you afford to fix it?
• Can you make necessary repairs on your home after a bad storm?
• If you lost your job, could you still pay your bills?

These emergencies can strike at any time. If you don’t have the funds now, you won’t have them when you need them. Starting an emergency fund today can help you say, “Yes!” with confidence to the questions above.

How To Start Saving

Emergency funds should be placed in a secure location where you won’t touch them unless you need it, like a savings account. There are different types of savings accounts out there, so make sure you pick one that gives you the best rate and access to your funds when you need them.

For example, you may want to avoid putting your funds into a savings certificate. While you can lock in a great rate, those funds are inaccessible without incurring a penalty fee until the term is up. High-yield and traditional savings accounts are better for emergency funds because you can access the funds when you need them. You can learn more about what savings account is best for you here.

Once you find a secure place to store your emergency fund, then you need to start making deposits. Adding “savings” as a line item in your budget will ensure you have a reminder to move funds over into this account. You can make this your monthly goal! Make sure you save enough to build your account balance but keep enough in your checking account for upcoming bills and expenses.

Once you start an emergency fund, check it regularly to see your progress. Then, sit back and have peace of mind knowing you will be ready if disaster strikes.