We all know that accidents happen. What many of us don’t know is what to do when they occur. Accidents can be expensive, and an emergency fund can help you cover the costs without having to risk your financial stability in the process.
What is an Emergency Fund?
An emergency fund can be defined as a sum of money set aside to cover unexpected expenses in the event they arise. For example, if your car breaks down or you need medical care for sudden illness and do not have the funds readily available from other sources this may be where your savings come into play. The goal with these types of accounts is that it should ideally last at least six months without needing any additional income coming in while providing some flexibility when unforeseen events happen such as having children, losing one’s job due to circumstances outside their control, etc.
The following are 5 steps that will get anyone started on building up their own personal ‘rainy day’ account:
When should I use my emergency fund?
Your emergency fund should only be used in real emergencies, like job loss or an unexpected trip to the vet. It is not for clothes shopping and it’s definitely never a good idea to use your emergency fund on something you want but don’t need – especially when there are other ways of getting what you wanted without spending money!
Where should I park my emergency fund?
A high-yield savings account is a great place to park an emergency fund because it offers higher APY on saving accounts and usually has zero fees. This will allow you to access your funds at any time, while still earning some interest without the risk of investing in stocks or other investments.
How to create an emergency fund
1. Save 1-month living expenses
Saving 6 months of living expenses may sound overwhelming at first, which is why creating small goals helps.
A good place to start might be saving 1-month worth of necessary living expenses (rent/mortgage, electricity, internet access). To calculate this amount you will need to list all your monthly bills and add them up. This number should be the goal that you work toward in order to get started on achieving greater savings!
2. Pay off debt
-Let’s say you have credit card debt, and your interest rate is 20%.
-If you’ve saved 1 month of living expenses in an emergency fund, now would be a great time to pay off some high-level balance cards that are likely costing you hundreds or thousands per year just for the privilege of carrying them.
3. Create an emergency fund goal
Goals make things exciting and motivating. Goals also keep you in check to make sure you’re making progress!
Your goals can look something like this:
Goal 1- by September, have one month’s worth of living expenses saved up.
Goal 2 -by December, two months’ worth of living expenses are saved up.
Goal 3- by February, three months’ worth of living expenses are saved up.
Keep these written down so they are all visible all the time. Some people like to use their refrigerator while others prefer Note apps on their iPhone or Android smartphones.
4. Pay off debt and save money
While it may seem like a daunting task to pay off debt and save money, you can do this by splitting your extra income between these two tasks. Paying off high-interest credit card debt is the best place to start as interest rates are typically high on any type of unsecured borrowing. Saving for an emergency fund should be done in addition to paying down debts; if anything were ever to happen that would require funds from our bank account such as medical costs, car repairs, etc., we want to have enough saved up so that there isn’t more financial stress added onto what is already occurring at the time (we don’t need things getting worse).
5. Make saving automatic
Making saving automatic is an easy way to save for your emergency fund. You can do this by setting up a recurring transfer with your bank, or you could even set it as the default option if they have that available! Contacting them over the phone and in-person are some ways of finding out how to go about making this happen.
If you don’t have an emergency fund yet, start saving for one today. It’s a good idea to save up at least six months’ worth of living expenses in case things go wrong and your income is cut off unexpectedly or something catastrophic happens like fire. It’s not a matter of if something will happen…but when! So be prepared!