Does an emergency fund seem like just one more thing you need in your budget? Is it actually important enough that I need to have one? Absolutely. Think about a time when you had an expense that you weren’t planning on. Has the cat needed a trip to the vet? Have you blown a tire on your car and suddenly needed to buy a new one? Have you discovered that your sink is leaking because suddenly your water bill is twice what it usually costs? Bankrate’s 2018 survey on Financial Security found that only 39% of Americans had enough in savings for a $1,000 emergency. With a little focus and budgeting, you can make sure that you are prepared and able to cover an emergency.
What is an emergency fund?
An emergency fund is money set aside just in case. You can have a budget and a plan for your money, but reality is that there are still financial surprises that will come your way. If you aren’t prepared, they will add unnecessary stress to your life as you try to figure out how to solve the problem of the unexpected bill. With an emergency fund, you will have a little bit in savings so that you will be more prepared to handle the ugly surprise bills when life hands them to you. Your emergency fund might not completely cover the cost, but it should at least help you sleep at night knowing that you won’t be starting from zero when a surprise bill arrives.
Why do I need an emergency fund?
Emergencies and unexpected expenses happen. Whether it’s your dog needing an unexpected x-ray to see if they ate a sock or an unrequested propane delivery the week before Christmas, it is easier to have some money set aside for those unexpected expenses. When an unexpected expense comes along, you might still be really upset, but at least you will know that you have a way to get the bill paid. Can’t you just put it on a credit card? With credit card interest rates currently averaging 16%, why would you want to carry a balance on a credit card unless you absolutely had to? When you have emergency savings, you won’t have to pay the extra credit card fees and interest and you can avoid getting deeper into the debt hole.
How much do you need saved in your emergency fund?
If you’re in the stage of life where you’re working to pay off debt, you should have $1,000 saved. If you have no debt left except your mortgage, you should target 3-6 months of expenses. While it might take a little while to build it up, once you have the right amount of money set aside, you don’t have to allocate money in your monthly budget to go to the fund anymore and you can breathe a little easier. You’ll know that when life and unexpected bills come your way, you have a plan to handle them. Depending on your specific situation, you may want a larger emergency fund. For example, if you know you’ll be out of work for any reason (including pregnancy) or if you’re planning to start a business you may want more money set aside for emergencies or other unexpected expenses.
Where do I keep my emergency fund?
The best place is in a savings account. Your money may not grow quickly, but it is accessible when you need it. The best savings accounts are ones with no fees that earn higher interest rates. Check out CIT Bank or Capital One as two good options. You should be sure to keep your emergency fund somewhere separate from your everyday money. If you leave it in with your checking account, it can be easy to forget that it’s set aside for emergencies only and can get used for expenses throughout the year. By having it in a separate account, you can trick yourself into thinking it doesn’t really exist and therefore isn’t money you will be tempted to spend.
When do you need an emergency fund?
Now. If you don’t have one, work to build one immediately. You never know when an emergency will come up. Don’t be discouraged if it takes you a while to get to $1,000 saved or if you make it to about $800 and then an emergency happens. Just stay focused and keep taking steps forward to build the account. Whether you’re 2 or 92, sometimes life gets in the way and can throw a wrench in your budget. If you have savings, an unexpected expense won’t ruin your whole budget or cause you to go deeper into debt. An emergency fund can be the security buffer to protect you from life’s ugly financial surprises.
Are you going to create an emergency fund? If you need some ideas for how to make more money, read 8 Ways to decrease your expenses. Have you had a time when an emergency fund has saved you from needing to put an unexpected expense? Share your experience in the comments below.