An Emergency Fund is money that has intentionally been set aside for significant unexpected expenses, life events, or emergencies, and will help protect you during tough financial times. We all hope that everything in life goes according to plan, but an Emergency Fund helps prepare you just in case things don’t.
Why You Need an Emergency Fund
Having a proper Emergency Fund prevents (or delays) you from having to borrow money and go into debt when you’re already in a difficult situation. What if you lost your job, or a family member got sick, an adequate emergency fund will allow you to focus on recovery instead of survival. It provides additional security when you need it most, and in the circumstance that you need the money, you will be thankful you have it!
How much do I need to save in an Emergency Fund?
In general, an Emergency Fund should cover 3-6 months of expenses. It can take some time to build up the savings desired, knowing that there are likely other financial priorities. However, keep in mind that there are other ways to fast-track your savings, perhaps from a portion of Grandma’s Christmas check, a yearly bonus, or a tax refund. Based on a $70,000 salary, let’s assume your essential expenses are $2,500 a month: mortgage, utilities, food. That means you should have $7,500 reserved to cover three months of expenses.
Things to consider when building your Emergency Fund
- Open an account with a separate bank than the one you are currently banking with; this makes it less likely you will spend the money on non-emergencies.
- Automate your contributions to this fund until you reach your goals.
- Open an account that has check-writing privileges. It makes it very easy to pay for a busted hot water heater on a day’s notice when all it takes is writing one check to the repair team.
- Choose a low-risk account that earns some interest; this could be savings or interest-bearing checking. Money market accounts could also serve to be a good option.
There are situations in which building up an Emergency Fund should be delayed based on your current financial circumstance. For instance, if you have large amounts of personal debt, especially high-interest debt such as credit cards or payday loans. When you are ready to build it as part of your financial plan, your budget will help you get there.