Managing your budget is stressful enough. Add financial emergencies – think job loss, illness, and injury, or major home and car repairs – and the consequences can be devastating. In fact, unforeseen major expenses are one of the biggest causes of bankruptcy in the United States.
While there’s a way to completely future-proof your finances, an emergency fund can help you weather those financial storms.
An emergency fund prepares you for unexpected financial issues without ending up in credit card debt, payday loans, being forced to get loans with unfair terms, or other borrowing options that can drive you deeper into debt.
It won’t solve all of your money issues, but it’s an excellent start to getting your finances in a better direction. Learn what an emergency fund is and how to start building one today.
What is an emergency fund?
An emergency fund, aka rainy-day fund, is a savings account meant to pay for big, unexpected expenses like:
- Medical emergencies
- Major replacement of appliances or home repair
- Major car repairs
- Unemployment
It should not be used for:
- Planned expenses such as purchasing a new car, a home, paying for college, etc.
- Paying off debt
- Regular expenses like utilities and rent
The more you can save in your emergency fund, the better. There is no upper limit. However, you don’t have to start with a large amount either. Starting small is better than not having any sort of emergency fund at all.
Why do I need an emergency fund?
With an emergency fund in place, you can enjoy peace of mind knowing that in the event of a massive emergency such as losing your job or getting seriously ill, you can focus on dealing with the emergency itself without worrying about financial survival.
Think of it as a financial buffer. Since you have extra money in the bank, you won’t have to take out high-interest loans or rely on credit cards. It’s particularly important to have an emergency fund if you’re trying to be debt-free because it helps you prevent borrowing more.
Emergency Funds Look Different for Everyone
There’s no hard and fast rule about how much you should have in your emergency fund because monthly expenses are different between people.
The basic idea is that your fund should be enough to cover your normal expenses even without income. For some people, this means having an emergency fund that includes a buffer. Others stick to a more bare-bones amount that’s just enough to pay the bills.
No matter the amount you decide on for your emergency fund, experts recommend going for a comfortable number.
Top FAQs about Emergency Funds
While everyone will approach their emergency fund differently, there are some simple guidelines you can follow to help you get started. Below are answers to common FAQs:
“What’s the right amount for my emergency fund?”
Financial experts recommend saving around six months’ worth of expenses, or half a year.
The ideal amount greatly depends on your financial circumstances. However, a good baseline is to save enough to cover your living expenses for three to six months with zero money coming in.
If you lose your job, for example, you can use your emergency savings to pay for basic needs while you’re job hunting. You can also use it to supplement any unemployment benefits you receive.
Remember not to overwhelm yourself with saving several months’ worth of money in a short time. Start small. Even $100 can get you out of a number of financial scrapes. Again, just start putting away any amount you can, and continue to build your fund over time.
“Where do I put my emergency fund?”
Consider keeping it in a savings account that you can easily access, such as a high-yield savings account. Aside from earning interest, the money is also safe because it’s federally insured up to $250,000. In addition, being able to access and withdraw your money is important because an emergency can happen at any time.
While the account should be accessible, it should also be separate from your regular bank account. This helps you avoid dipping into your emergency funds for daily expenses.
“How do I build an emergency fund?”
It’s okay to be overwhelmed with the thought of building an emergency fund. The task of saving money is already challenging for many people, besides trying to save even more for unforeseen circumstances.
Breaking down the process into steps makes it more manageable. Start building your emergency fund one step at a time:
Calculate how much you want to save in total.
You may do this manually or using the many emergency savings calculators available online. To begin, list down all of your expenses in a given month. No expense is too small – factor in everything from your rent down to every cent you usually spend on food. Then, multiply them by three to six months.
Automate saving for your emergency fund.
Building the habit of saving regularly is easier when you don’t have to set aside the cash manually. Automating the process reduces the temptation of spending the money on other things.
Set up automatic transfers from your savings account to your emergency fund account every time you get paid.
Keep the change.
“Change” in this context means any extra money as small as a dollar and as big as your tax refund. Directing as much money as possible into your emergency savings is a great way to boost your stash.
Assess and adjust your emergency fund contributions.
Once you get your emergency savings going, check-in after a few months. Note how much you’re saving, because you may have to increase it depending on your current circumstances.
This is particularly important during major life events like moving to a new city, having a new baby, or getting married.
No matter what your present situation is, it’s always a good idea to increase your emergency fund contribution as much and as often as possible.
Creating an Emergency Fund: Start Small, But Start Now
Once you’ve saved even a small emergency fund, it’s easier to handle life’s unexpected events without being driven deeper into debt. It’s never too late or too early to begin saving for emergencies. Any amount is enough to start – $50, $100, $500, or even a dollar if it’s all you can spare. What’s important is to actually get started so you can get that momentum going.
[Read Next: Why Saving Money Feels So Hard (And 3 Unusual Tips to Make it Easier)]
Tycoono Media Inc. and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. You should consult your own tax, legal, financial and accounting advisors before engaging in any transaction. Please refer to our disclaimer for more information.
