What is an emergency fund and why do you need one? An emergency fund is the money that you set aside to cover large unexpected expenses. These can be expenses such as an emergency room visit, replacing or repairing a large appliance in your home, car repairs, or even unemployment. Emergency funds are meant to assist you with avoiding high-interest debt, such as credit cards. One major emergency with a credit card can put you behind for years as you attempt to climb out of the original debt, and those that may come after.
How much should one save? That can depend on your long-term goals. If you are just starting out, it may be a struggle to save even a little extra each month. A modest goal of one thousand or even five hundred dollars can be a baseline to get you out of some financial scrapes and can be built over time. Ultimately it would be ideal to have three to six months of living expenses saved or in assets that you can access immediately. Small steps to begin, then continue building to the point that you are comfortable.
Where do you keep your emergency fund? Emergencies happen without warning, so having the money accessible is the best. You don’t want to tie the funds up in savings bonds or other long-term savings methods. Finding a savings account with a high-interest rate could be the best place. Finding an account that is insured is also an advantage. Being able to withdraw or transfer the funds easily is the goal. Having it linked to your checking account can make contributions easier but may also tempt you to use the funds for non-emergency situations. Finding a balance between accessibility for emergencies, but out of reach for impulse spending is key.
Having an emergency fund can be the start of a healthier budget and long-term financial goals. Start saving now. Find an empty jar and start filling it with the change from the couch, between the seats in the car and the change from your last lunch date. Over time that change can add up to dollars saved as you plan for emergencies and provide peace of mind should something happen.
Contributed by – Kat Lovell Pejic