Why You Should Have an Emergency Fund: 5 Tips to Get You Started
Would you be able to cover an emergency in your life? From hospital visits to car repairs, unexpected expenses can throw a real wrench in your finances. According to the Consumer Financial Protection Bureau, around 40% of American adults are unable to cover a $400 emergency expense without selling something or borrowing money.
What is an Emergency Fund?
An emergency fund is a dedicated account set aside to cover unexpected financial problems, such as a job layoff, medical expense, or home/auto repair. The main purpose is to make sure you feel comfortable and secure with your finances by having a safety net of funds that can be used to meet emergency costs. Additionally, an emergency fund can limit the need for you to use high-interest debt options, such as loans and credit cards, since you will be pulling money directly from your dedicated account. Now that you have a better understanding of what an emergency fund is, here are a few tips to help you get you started!
- Be prepared. Don’t let yourself get stuck in a situation that stops you from being financially successful. Having money set aside can help you handle unexpected costs when they happen without having to skip other bills or borrow money. Not having to rely on credit cards or other types of loans will end up saving you money on interest and won’t let you fall behind on other vital expenses.
- Make Saving Easy. A great way to save money to your emergency fund is to automate a set amount from your paycheck to go directly into a savings account. Be sure to keep these savings liquid and somewhere you can easily access it at a moment’s notice.
- Leverage what you already have. Starting an emergency fund savings plan can be tough, especially if you feel like your paycheck is already spent before you even get it. Take advantage of the money that already came out of your paychecks by saving at least 25% of your tax return. With the average tax return of a few thousand dollars, it could be a big help down the road when an emergency occurs.
- Make a plan. Think about the bills you have due and the order of importance. Weigh the risks of falling behind on one or more bills. Having an emergency fund will help pay the important bills like a mortgage if something happens like the loss of a job.
- Keep it going. It is easy to spend money when you have it. Make sure you keep this emergency savings fund even if you do not think you will need it. You never know what life can throw your way when you are not expecting it so it is a great idea to have that safety net.
How Much Should I Have in an Emergency Fund?
Another important question we often hear is focused around the amount you should have in your emergency fund. It is recommended to have at least three months of living expenses in this dedicated savings account. Depending on your lifestyle and current expenses, you want to make sure you can cover things such as rent, utilities, food and gas. Additionally, if you have other people who depend on you financially like a child, parent or spouse, it’s recommended that your emergency fund be six months’ worth of living expenses. For a more accurate estimate, use our emergency fund calculator
to see how much you should really save.
Whether you have an upcoming emergency expense or not, it is always a great idea to plan for the unexpected. Remember, it’s better to start small then to never begin. Keeping your personal finance in check can help set you up for success.
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