Emergency Fund: Goals & Finding the Right Amounts for You
Despite our best-laid plans, financial emergencies can arise seemingly at random. Sudden, mandatory expenses pop up for everyone sooner or later, so preparing for the unexpected is essential. Setting yourself up with a financial safety net is necessary, as these financial emergencies often cannot be avoided. An emergency fund can do just that. An emergency fund can help individuals prevent debt or rely on credit cards or loans to cover unexpected expenses. By employing this simple financial strategy, you can empower yourself to navigate life's uncertainties without fear.
What Is an Emergency Fund?
An emergency fund is a financial safety net designed to cover unexpected expenses. An emergency fund is usually a bank account, usually a high-yield savings account. Try to leave your emergency fund alone unless it is your last resource. Any number of significant expenditures can arise in daily life. Suppose you must prepare for medical emergencies, car repairs, home repairs, job loss, or other unforeseen circumstances. In that case, it can cause you and your family great financial hardship. However, by setting up an emergency fund, you can rely on it.
Benefits of an Emergency Fund
Access to an emergency fund means you can rely on your past efforts for additional financial support. Instead of scrambling in a crisis, an emergency fund provides peace of mind and can help reduce anxiety about money. In addition to reducing stress, having extra money available will allow you to cover essential expenses and keep your debt repayments on track even in times when you don’t have a regular paycheck. Using the funds to keep up your debt payments will also help you maintain a good credit score.
Where to Keep an Emergency Fund
You can pursue several avenues if you’d like to start an emergency fund for you and your family. One of the most common is a savings account with your bank. Start an account offering a higher interest rate than a regular savings account, providing some growth on your emergency fund while keeping it easily accessible. Another way to build up funds is through your employer. Ask your company if it can set up automatic contributions to a separate account. This measure is also a great way to prevent yourself from pulling money out for frivolous expenditures.
How Much Should Be in an Emergency Fund?
The ideal amount in an emergency fund varies from individual to individual. However, there are a few steps to consider as you build yours up. A common recommendation is to aim for enough savings to cover three to six months' living expenses. Consider your income, monthly expenses, and financial obligations as you start contributing to the account. Try to calculate how long you’ll be able to live off of your emergency fund if you were unable to work. You should also consider how your life might change if you contribute too much to the emergency fund.
Assess your comfort level with risk and uncertainty. Homeowners with families, for example, may want to avoid risk and save as much as possible.
Contributing to Your Emergency Fund
To ensure the success of your emergency fund, you’ll need to generate enough funds to set aside for a rainy day. Start by setting a goal. Determine how much you need to save for your emergency fund based on your monthly expenses and financial situation. Once you have that number in mind, track your income and expenses to identify areas where you can cut back and redirect funds toward your emergency fund. Whenever you receive unexpected windfalls such as tax refunds, bonuses, or gifts, consider putting a portion or all of it into your emergency fund rather than spending it on non-essential items. Once you have enough saved, remind yourself that one of the keys to success with an emergency fund is to leave the money alone. Only take cash out in the case of an emergency!
