- What is an emergency fund?
- How much should my emergency fund be?
- How many months should you have in your emergency fund?
- Where to keep an emergency fund
- How to start an emergency fund
- Bottom line
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It all happened so quickly, yet I can close my eyes and see everything so vividly.
It went like this. When I was 22, shortly after starting my first career job, I got in a car accident. Luckily, everything was fine – except for my nerves and my car. I was going to have to pay a high deductible through my insurance company in order to get my car repaired. But, I had just begun my job and my first paycheck wasn’t slated to hit for a few more weeks.
This whole situation could have caused serious financial stress. But it didn’t because I had an emergency fund. This meant I had money in a savings account for the specific purpose of paying for unexpected expenses. Ever since that unfortunate car accident, I’ve known first-hand how important it is to save enough money into an emergency fund.
What is an emergency fund?
At this time, you may want a more clear answer to the question “What is an emergency fund? You may also want to know how this type of fund differs from a regular savings account. Here’s the long and short of it: an emergency fund is money that is set aside for the purpose of bailing you out of crummy situations. Emergencies happen at some point and no one is spared.
For example, you could get in a car accident, like I did. Or, you could lose your job or get ill. Here’s another thing that can happen: your home might suffer damage after a natural disaster and you suddenly need to pay for repairs. In all of these situations, an emergency fund can help ease the financial pain, allowing you to handle unexpected bills and expenses. Dealing with an emergency can also take up a lot of your time and be emotionally draining. Having money on hand can help you avoid additional financial stress and give you the power to deal with the problem head-on. You can then take steps to move forward.
How much should my emergency fund be?
The answer here totally depends on you and your lifestyle. To help you decide your emergency fund amount, take these questions into account:
- Do you have debt?
- Do you have kids?
- Do you live in an area with a high cost of living?
- How much money do you need to survive each month?
- Do you have a car?
- Do you have pets?
These questions are important to consider because a single person living in a low cost of living area can get away with a smaller emergency fund than someone who has kids, pets, and lives in an expensive city like New York or San Francisco.
How many months should you have in your emergency fund?
There are is no one right answer to this question. As stated above, you should take your personal circumstances into consideration. With this said, there are some benchmarks you can factor in when deciding how much to save in your emergency fund.
For example, Dave Ramsey, the get-out-of-debt guru, suggests having a $1,000 emergency fund while paying off debt. When it comes to expenses, however, a better question may be: “How many months should you have in your emergency fund?”
Some financial experts suggest saving three to six months’ worth of expenses while others suggest saving more aggressively for six to 12 months’ worth of expenses. Again, it all boils down to your lifestyle and risk tolerance.
Where to keep an emergency fund
When you’re trying to figure out how to start an emergency fund, you may want to know exactly where you should put all that cash. After all, it’s not going to be an insignificant amount of money. You definitely don’t want this money hiding under a mattress! But you may also not want to deal with the volatility of the stock market, either.
When it comes to where to put an emergency fund, you want it to be safe. It’s also important that the money is liquid so that it’s readily available if and when you need it.
Pro tip: Look for a high-interest savings account to park your emergency fund money.
How to start an emergency fund
If you’re stressing about how to start an emergency fund, don’t fret. It doesn’t have to be complicated. You can open up a separate savings account specifically for the purpose of housing your emergency fund.
Commit to not touching this pot of money unless it’s an absolute emergency. And, an emergency should be defined as something you can’t live without or something that will seriously impact your way of life. For example, if you’re short on rent money because of a job loss, that is an emergency. But, if you want to go to a friend’s out-of-state wedding, that is not an emergency.
Once you have a separate savings account, you can sign-up for automatic contributions from your checking to your savings with every payday. For example, you can save 10 percent of your salary and put it into an emergency fund. If that’s too much, you can even start with $10-$25 per week. The key is to start somewhere and continue to build your emergency fund.
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Having an emergency fund is an important part of your financial wellness. When you focus on your financial health, you can support other areas of wellness, too.
In fact, having an emergency fund will help you stress less because if you have enough cash on hand to deal with emergencies, you’ll also have peace of mind.
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