You need an emergency fund to help pay for those unexpected expenses that can cause financial ruin.
Do you live paycheck to paycheck fearing anything that could go wrong and force you to deal with unexpected expenses? Are you worried about how you’d pay those expenses?
An emergency fund is one of the best ways to address this concern. With money set aside, you can rest assured knowing that you’ll have a safety net to help you weather an unexpected setback without putting yourself into debt.
This fund should be separate from all other funds, especially your checking account that you normally use for spending.
People use emergency funds for all types of things including sudden medical expenses, missing work due to an illness, car repairs, and home repairs just to name a few. Keep reading to learn how much you should save, where you should save it, and how to continually add to your fund.
How Much Should You Save?
Ultimately, you should have three to six months of expenses saved in an emergency fund. If your normal monthly expenses are $3,000, for example, you should aim to save between $9,000 and $18,000 in your fund. This doesn’t mean you have to have that amount right away – it’s just a goal to try to achieve, but any amount you can save may help you down the road.
At the very least, start off by saving $1,000. While that’s not going to fund major emergencies, it’s at least a start. Once you reach $1,000, you can then set another achievable goal according to your financial abilities to save, helping you reach your goal of three to six months’ of expenses eventually.
How to Start an Emergency Fund
If you are starting from scratch, you may find yourself wondering where you even start. Don’t try to bite off more than you can chew. Even if you can only save a little right now, that’s okay – it’s a start. Every dollar you save today will grow and that interest will grow, making that single dollar worth more before long.
If you aren’t sure how much you can save, take a look at your budget. Do you have room for savings? If it’s not even a line item on your budget, make it one. Again, it doesn’t matter if you set aside $5 or $500; just make it a part of your budget. You can always work up from there – the key is to start and the motivation will continue to grow as your account balance grows.
Where Should You Keep Your Emergency Fund?
Now it’s time to figure out where you should keep your emergency fund. Again, whether it’s $5 or $500, you need to put it somewhere that is separate from your spend account.
A few things to keep in mind:
- The funds should be liquid. Don’t put the money in an account that you can’t access quickly or that will incur a penalty if you access them too soon.
- The funds should be safe. While earning interest on your money is ideal, if you have to risk its safety, you may find yourself without the funds you need when you need them. Stick with a savings or money market account.
- The funds should be insured. Finally, consider placing your funds in an account that is FDIC insured. If you want to earn higher interest rates than your local bank offers on savings accounts, consider a high-yield savings or checking account, or a money market account online.
Finding Ways to Add to Your Emergency Fund
Even when it feels like you’ll never be able to add to your emergency fund, especially if you live paycheck to paycheck, there are always ways:
- Set up automatic deposit from your paycheck directly into your savings account. Even if it’s only a few dollars, it adds up, especially when it’s on autopilot.
- Bank all windfalls. If you get a tax refund, bonus at work or you sell items and make money, put the funds right in your emergency fund. When it’s out of sight, you are less likely to spend it needlessly.
- Start a side gig. If you really do live paycheck to paycheck, find a side gig either online or in person that you can do to bring in some extra cash.
- Cut down your bills. Be honest with yourself as you go through your bank statements. Where do you spend that you don’t need to or what services can you cut down? There are always ways to cut down and save a few dollars or more. Services like Truebill can help you track down recurring expenses you may have forgotten about.
When Should you Use an Emergency Fund
You take the time and effort necessary to save up for your emergency fund, but when can you use it? As the name suggests, you should only use it in true emergencies. Finding out that you don’t have enough to pay a predictable annual bill isn’t an emergency. True emergencies are unexpected medical bills, car repair bills, or covering your monthly bills because you lost your job.
Avoid using your funds on:
- One time expenses that you knew about but didn’t save for
- Predictable monthly expenses (unless you lost your job)
- Predictable expenses that happen periodically like car maintenance or real estate taxes
If you don’t have an emergency fund, now is the time to start. You don’t have to be rich or have a lot of extra money each month. Instead, you just need the motivation to start somewhere. Once you see your money start growing, you’ll be motivated to keep it going. When you have money saved for a rainy day, it gives you a sense of peace of mind. You don’t have to lose sleep at night wondering how you’ll cover a major catastrophe – you’ll know that you have yourself covered.