An emergency fund is an account where you set aside money in the case of large, unexpected expenses. You might think expenses such as high medical bills, home repair, car repair, and unemployment won’t happen anytime soon. But, the unexpected might happen. During those financially-unstable times, this fund will help to keep you afloat. If you already have debt, it is even more essential that you have an emergency fund because it’ll help you to avoid taking out more loans.
How much should you have in an emergency fund?
If you are starting from scratch, try setting aside $500. Once you’re able to, you should try to build your account up to at least the amount it would take you to live for six months. Once you have your funds, you should avoid touching it, no matter how much you want another shopping spree or vacation. If something unexpected comes along such as losing your job, you’ll have enough money to get you through until you find another.
Some might then say that they can’t afford to set aside money for an emergency fund, but it all depends on your financial situation. There are ways that every one of us can cut corners and learn to save a little more.
Where do you put your emergency fund?
The next step is knowing where to put your emergency fund. Try opening a savings account with a bank or company that has a high-interest rate and lets you access your fund quickly. An emergency can happen when you least expect it. You don’t want an investment fund or an account where it’ll take you a few days to access your money after requesting it. It’s also crucial that your emergency account is separate from the account you use for daily expenses. This creates less of an incentive for you to use the money within this fund. Another option is to put your emergency fund in a high-yield savings account. These accounts are federally insured up to $250,000, earn interest, and allow quick access.
So, you might be wondering: how exactly am I going to come up with the money for my emergency fund? Here are some steps to help you build your fund:
1. Calculate the amount that you want to save
Calculate your monthly expenses: rent, food, utility bills, subscription bills, miscellaneous, and debt repayment. Then, multiply this number by 6 in order to get an estimate of how much money you would need to live for six months.
2. Get into the habit of saving
Building good saving habits will make building an emergency fund much faster. Try budgeting, eating out less, and using coupons. Another way to build your fund without much effort is to set up an automatic payment. Every time you get paid, a portion of your check will go towards this fund.
3. Put your spare change into the emergency fund
By using apps that help you to save on purchases, you can link your bank accounts and automatically transfer the extra amount into your emergency account. If you don’t want to use an app, the same concept applies if you have a jar that you put spare change into. This builds up over time, and you can eventually deposit the total into the emergency fund.
4. Put your tax refund into your emergency fund
If you make less than a certain amount per year, the IRS will most likely refund the taxes they took out of your paycheck. So, placing this money into your emergency account will help to boost it by a significant amount. Just think of it as money that was already taken out in the first place.
After you’ve saved up a significant amount, calculated the expenses, and set aside enough money, you can start to use the money you save on investing instead. Please note, only invest if you’ve saved the recommended amount of your monthly living expenses multiplied by 6.
Unless it is a significant emergency, do not dip into this fund. It can end up costing you big-time in the future.
Emergency Fund: What It Is and Why It Matters by Margarette Burnette from Nerdwallet
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