Whether you’re trying to get out of debt or just starting improve your financial situation, you need to set aside emergency savings. While it is more exciting to invest than to save up for an emergency fund, it is necessary to have an emergency fund for your financial success.
This post is going to tell you everything you need to know about emergency funds – why you should start an emergency fund, how much money you need, how to save, and where you should keep that money. Anyways, here’s what you need to know about emergency funds!
What is an Emergency Fund and Why Do You Need One?
An emergency fund is savings that you set aside in the event of an emergency. It is your safety net in case something big, unexpected and potentially life changing happens – like losing your job, unexpected medical expenses not fully covered by insurance, death of a family member or having to repair your house or car. An emergency fund is cash you put aside for life’s inconveniences or unexpected expenses. It’s meant to keep you out of debt and away from your long-term investments.
How Much Money Should Be In Your Emergency Fund?
Financial advisers often suggest that emergency funds should contain enough cash to cover all expenses in a three to six month period. But eventually, the amount you need is dependent upon your personal situation and comfort level. If you are single or have no dependents, save up to three months worth of expenses in your emergency fund. If you are married or have dependents, your emergency funds should be enough to cover all expenses for about six months to a year. In my opinion, it’s better to have too much in your emergency fund rather than not enough. You know the old saying – “it’s better to be safe than sorry!”
Where Should You Keep Your Emergency Fund?
Now that you know how important it is to have protect your emergency fund, you need to choose where to keep this money. The purpose of your emergency fund is to have cash set aside to protect you when an emergency happens. For this reason, your emergency fund should not be in long-term investments (like in a mutual fund or stock). You have to make sure it’s easily accessible. The purpose of an emergency fund is not to earn money and invest – the purpose of an emergency fund is for it to be there when you really need it.
Here are two great places to store your emergency fund: a savings account or a money market fund. Both of which are usually offered by banks.
Savings Account. Despite their low interest rates, a savings account is a great place to keep your emergency fund. Place your emergency fund money in a separate account. Don’t mix it with your salary payday bank account. DON’T touch it unless it’s an emergency. This way, when you really need it, it’s there.
FYI: Some banks offer an ‘automatic deposit’ option, which transfers money from your ATM-based account to a savings account. You just specify how much you want to save and when you want it transferred, and the bank does the rest.
Money Market Account. Rather than storing an emergency fund in a savings account, I actually have mine in a money market fund. While most money market funds have a higher minimum deposit requirement, it offers a higher interest rate than a savings account. So actually, once you’ve made the minimum requirement, it makes more sense to keep your emergency funds this type of account.
Anything Else You Want to Know?
An emergency fund is pretty basic. It’s just cash for you to fall back on.
If you don’t know how to get started, the best thing you can do is to smart small. Whatever you can afford this month, do it. Put something – anything – into an savings account and start saving little by little. Over time, you’ll see your account increase and you may even be inspired to save at a faster rate. When an emergency happens, you’ll be ready.
And when you do use your emergency fund, make sure to refill your depleted emergency savings.
Do you have an emergency fund? What are some creative ways you’ve used to build it?
photo credit: Emergency banana peel via photopin (license)