In case you didn’t know, an emergency money fund is essentially a separate bank account or savings account that you put money into in case there is ever a larger unexpected expense. Ideally it is for a true emergency such as:
• Big home appliance replacement
• Unforeseen unemployment
• A visit to the emergency room
• Major car repair
While there are many other situations that may be considered an emergency, these are just some of the more common ones. Now that you know what an emergency can be used for, this is why you need an emergency money fund.
When you find yourself in a financial bind that you really can’t afford to be in, having an emergency fund is perfect since it prevents you from having to borrow money. The buffer that your emergency fund is going to provide for can keep you ‘in the green’, without needing to max out credit cards or worse, take out a loan with high interest rates. If you already have these obligations in your life, this is an especially important thing to avoid.
Just remember, the best way to climb out of your debt, is to keep yourself out of more debt. With that being said, how much should you be saving for your emergency fund every month?
While this really depends upon your personal financial circumstances, the general goal of your emergency money fund should be to be able to have enough to cover a minimum of three to six months of all your living expenses. For instance, if you unexpectedly lose your job, your emergency fund can pay for you to live while you search for a new one, and even supplement unemployment benefits.
Three to six months of living does sound like a lot at first, but remember to keep it simple and start small. Start by trying to add a couple hundred dollars per paycheck to start. It can be anything, but just get started. Even an extra couple hundred dollars is more helpful than zero dollars when you really need it.
Once you decide how much you are going to save, be sure that you store it in a high-yield savings account. Be sure that it’s federally insured up to at least $250,000, so that you can rest assured that your emergency fund is safe. Your money, which is just sitting there, is going to earn you a higher interest rate than your regular savings account, meaning you will now be making money off of your emergency fund as well. On top of that, you still have quick access to all of it when you do need it. It’s a definite win-win.
No that you know the what, why and where of building an emergency money fund, how are supposed to save for it? Here are some steps to help you build your emergency money fund.
Set a savings goal for the month – By setting a goal to achieve, chances are you will be more likely to hit that goal. Just remember that when you are setting your monthly goal, it is ok to start small.
Save the change – Every time you have some extra change in your wallet from breaking that $20 bill, simply put some of it into a jar at home. At the end of the month you can then deposit that change into your emergency fund savings account. Another way is to use an app that will automatically save the change for you whenever you use your debit or credit cards.
Start supplementing your income – If you can, get a side hustle. In this day and age, making money in your spare time is one of the easiest things to do. You can drive for Uber, do things online like taking surveys or watch videos, and anything else you can think of. Now take this extra money and put it into your emergency fund savings account.
At the end of the day, when an emergency happens, you will be grateful that you prepared for it. While it may not be important to you right now, it will be once it happens. Just remember that an emergency fund should be for just that, an emergency. And no, your cousin’s birthday party doesn’t count as an emergency.
You should always be prepared for the unexpected. While it will hopefully not happen often, it will happen eventually. By having an emergency money fund, you will be able to weather some short-term financial storms without going into serious debt.