If there’s one thing that most personal finance experts can agree on, it’s that everyone needs to have some emergency savings. Having a few months of living expenses in a separate account dedicated to savings is a good idea, because it can help you cover unplanned expenses without going into debt.
While an emergency fund won’t solve all your money problems, it’s a great start to getting your finances headed in the right direction. Here’s exactly what an emergency fund is and what you need to know about them.
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What Is An Emergency Fund?
Before we break down exactly what an emergency fund is, let’s define what it is not:
- It does not have to a large, unattainable amount; it can start small.
- Not used for planned purchases like a house, a new car, a college education, and so on.
- It is not a set amount for everyone—it varies based on your lifestyle.
An emergency fund is money you set aside for when an emergency upends your world and you need money to do what needs to be done.
Having an emergency fund gives you the peace of mind to know that should something truly awful happen, such as losing your job, you can worry about how to deal with the emergency itself and not worry about how you’re going to survive financially.
Why you need an Emergency Fund
In an ideal world, you’d never have to touch your Emergency Fund, and it could just keep on growing. But the reality is, you’ll probably have to use your emergency savings from time to time — for things like flat tires and emergency vet services and a flight home for a family emergency. Having a stash of emergency savings can give you peace of mind, with better, more flexible options when facing a difficult situation.
How Big Should My Emergency Fund Be?
The more stable your income and household are, the less you need in your emergency fund.
If you’re part of a two-income household or you’ve had a steady job for several years, then a three-month emergency fund is probably just fine. But if you’re a one-income family, you’re self-employed, or you earn straight commission, then a six-month emergency fund is probably a better idea for you since a job loss could make you unable to pay the bills.
You should also aim for a six-month fund if someone in your house has a chronic medical condition that requires frequent visits to the doctor or hospital. Even if there’s room in your monthly budget to pay for the expenses, it’s good to be prepared in case a big emergency hits.
Where should I keep my emergency savings?
Your emergency fund should be liquid, meaning you need to keep it in a place where you can get to it easily and quickly. The best option is a simple checking account or money market account that comes with a debit card or check-writing privileges. That way, you can pay that doctor or mechanic quickly and with no headaches.
But make sure you’re not keeping your emergency fund in a place that’s too easy to access. You don’t want to be tempted to dip into it!
- High-Yield Savings Accounts.
- Money Market Accounts.
- Certificates of Deposit (CDs)
- Roth Individual Retirement Account (IRA)
- Consider a Multi-Faceted Approach.
How to Build an Emergency Fund
1. Make a budget and live by it: List all your monthly income and any expenses. When you’re making your budget, you’ll be able to see how much money you have available to put toward your savings goal. This will help you as you get ready to jump into the next step.
2. Set a monthly savings goal: This is how much you want to set aside each month to continue building up your emergency fund. I know, taking money from your paycheck and putting it away to save for the future can be really hard. But you’ll be surprised at how quickly your savings can grow if you’re consistent about adding to it! Don’t know how much is the right amount? Go back to step one and work that budget.
3. Adjust how much you save: As time goes by, you might be able to save even more! If you or your spouse get a promotion at work, that means you can add more cash to your savings! Be sure to look over your budget for new ways to tighten the purse strings and up the amount you’re saving.
When should I use my emergency fund?
When a sudden expense pops up, it can feel like an emergency—but that might not be true. Here are three questions to ask yourself to determine if you need to tap into your emergency savings:
- Is the purchase unexpected?
- How Urgent is it?
- Is it necessary?
The more you answer yes, the more likely that situation you’re in is an emergency and justifies using money from your emergency fund.
Conclusion
To keep your emergency fund secure, avoid placing your rainy-day savings in high-risk investments like the stock market. Instead, opt for low-risk alternatives that offer a guaranteed return without jeopardizing your hard-earned money. Having the extra funds available during emergencies can help you pay for unplanned expenses and preserve your financial health.
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