Planning for the future is important. Part of that planning should include financial security. We all face unforeseen expenses, and if you live paycheck to paycheck, a financial emergency can easily turn into a financial catastrophe.
In times of need, you may go into debt if you don't have money saved. Other consequences could include losing your home, not having enough food, not being able to pay for medical necessities, not having insurance or having your car repossessed.
An emergency fund is a great start to moving your finances in the right direction. It will allow you to look toward the future without stressing about unexpected expenses.
Figure out how much you need and how to get started below.
What's an emergency fund?
An emergency fund is money that's set aside for unforeseen expenses. It's also easy to access when you need it. Unforeseen expenses could come from a medical emergency, job loss or repairs for a car or home.
Keeping the money in a separate account can help curb frivolous spending, and having this money will give you peace of mind and freedom. Emergencies happen to everyone, so everyone needs an emergency fund. But the amount you need will vary based on your lifestyle.
When you should use your emergency fund
It's best to use your emergency fund only for true emergencies, not for expected expenses that you haven't budgeted for. True emergencies are events that threaten your financial future, health or assets, such as losing your job, medical expenses or home or car damage.
How much to save for an emergency fund
This amount will vary for each person, but most experts recommend saving at least three to six months of living expenses. It's up to you to decide how you want to live during an emergency. If you're OK with having a tight budget, just include rent or mortgage, utilities, car payments, other bills and groceries. If you want to live more luxuriously on your emergency fund, consider other expenses, such as eating out and clothing.
Set a reasonable timeframe in which you're going to grow your fund. It's best to start with a small goal ($500 to $1,500) and grow from there. Create a monthly budget so that you know how much you're contributing to your emergency fund each month, and make it a priority to add extra money when your budget allows for it.
How to save for an emergency fund
To start, figure out your monthly cost of living by creating a budget. You'll want to multiple this number by three or six, and that will be your savings goal. Don't forget to modify your emergency fund number as your life circumstances change, such as when you start a family or get a promotion.
To save money more quickly, cut back on unnecessary expenses, and put the money you save into your emergency fund. Consider cutting your dining, clothing and cable budget and looking for deals when you do need to buy something. Spend money sensibly, and buy items that are within your budget. Saving for an emergency fund is not the time to go into more debt.
If you've cut as much as you can and still aren't able to save for an emergency fund, consider making some extra money with a side hustle. You can do something simple, like drive for Uber, babysit or resell items you own. Or if you have a specialized skill (such as photography, writing or designing), you can use that to make extra money.
Is it better to save or pay down debt?
There's disagreement about whether it's wiser to save for an emergency or pay down your debt first. If you have no savings, you'll continue going into debt each time you encounter an emergency, making it difficult to get on track. But if you focus on saving, your debt will continue to increase through interest, meaning you'll end up paying a lot more over time.
A good suggestion is to save a small amount ($500 to $1,500) before focusing on your debt. Once you have this small buffer, you can start making extra payments toward your debt. If you need to pull money from your emergency fund during this time, make sure to replenish it. The sooner you're out of debt, the quicker you'll be able to save more in your emergency fund.
Where to keep your emergency funds
Start your fund somewhere that you can easily access it, such as a savings account or a money market account. These liquid (easy-to-access) accounts can also earn you a little interest on your money.
Once you've saved your three to six months of expenses, you may want to invest some of the money for a higher interest rate. A good option is short-term bonds(opens in a new tab). This way, you'll still have fairly quick access to the funds. You can also look at high-yield savings accounts(opens in a new tab), which will provide more interest than a regular savings account and still give you immediate access to your funds.
Get started today
It's not too late to start building your emergency fund. There are many reasons to plan for the unexpected, from medical emergencies to auto repairs. With extra money in the bank, you won't have the stress of looming unexpected expenses. And you'll be taking a great step to a happier financial future.
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