According to Bankrate, three in ten adults in the United States do not have an emergency fund. This means — in most cases — that if presented with an unexpected expense, three in ten adults in the United States would be unprepared. In order to better prepare yourself for situations like this, an emergency fund is an excellent solution.
What Is An Emergency Fund?
An emergency fund is money set aside for expenses that are unexpected or outside of a planned budget. If you suddenly need to take your dog to the vet and get a new washer and dryer, this fund will become a lifesaver. Bear in mind that this fund should be strictly used for emergencies, and not for purchases that you want outside of your set budget but don’t need. Some examples of unexpected expenses are:
- Home/home appliance repairs;
- Automobile repair/replacement;
- Doctor visits/surgery;
- Vet visits.
Why Do You Need an Emergency Fund?
Although you may be debt-free now, life can throw you some curveballs. In a study done by Bankrate, 30% of survey respondents claim that they — or a close relative — have suffered from an unexpected expense in the last year. Emergencies often give little warning (if any). It is better to be prepared beforehand, since you never truly know when something unexpected could occur. In the case that something did happen and you were unable to cover the expenses, the state of your finances — and potentially your well-being — are at risk.
How Much Should You Have In an Emergency Fund?
The amount of money that you should have in an emergency depends on the individual(s). Typically, the more financially stable you are (i.e. long-term job, dual-income, etc.) and the less monthly expenses you have, the less money you need to store away in an emergency fund. There are certain instances where you should set aside more in your emergency fund. Examples include if you or your family have:
- Serious medical issues;
- A large family with a single income;
- Low insurance coverage.
According to Forbes, a good rule of thumb to determine a numerical amount for your emergency fund is to save three to six months of living expenses. Living expenses typically include things such as housing, food, insurance, and certain running costs specific to the individual(s). This aside, any amount that is put in an emergency fund is a good start.
Where To Keep Emergency Funds
Where to keep emergency funds is difficult, because you want the money in a safe, out-of-sight place. Since it is an emergency fund, though, you also want it to be quickly accessible. While it is up to the individual where to keep emergency funds, two good options are:
- A savings account;
- A money market account.
Typically, neither type of account has a debit card attached to them, so it’s easier to avoid unnecessary spending while protecting your money. Another tip to help avoid dipping into emergency funding is to open the emergency fund account at a different bank than the bank you use for your daily finances.
How to Build an Emergency Fund
Building an emergency fund is a process that takes time, but when you prioritize creating a safety blanket over unnecessary spending, it takes less time than you might realize. Below are a few tips to help create your emergency fund in a safe and effective manner.
Set a Savings Goal
Determining how much you want to save is crucial. You can’t work towards a goal if you are unaware of what your saving intentions are. Set an appropriate amount that you want to save for long-term, and decide how you are going to contribute to that short-term.
Build It Into Your Budget
Once you have chosen an amount that you want to put aside for an emergency fund, you can figure a dollar amount into updating or creating a budget. The amount you put aside doesn’t need to leave you penniless, but including some sort of recurring contribution to your emergency fund in your budget can help drastically.
Adjust Your Savings
Life changes daily, so one month you may be able to contribute significantly to your fund, while other times it may be hard to put even a penny into your account. It is okay for the amount you put into your fund to fluctuate. An emergency fund should help bail you out of an emergency, not drive you into debt.
Quick Emergency Fund Options
If you find yourself in true need of some emergency funds, and you haven’t yet built up your savings, there are some options including:
- Borrowing money (friends/family);
- Personal loans;
- Payday loans;
- Pawning/Selling personal belongings.
There are additionally creative — more time-intensive — ways to add to your funds, such as investing in the stock market and putting profit into your emergency fund, or eating out one less time a month. Alternatively, consider paying off debt and allocating what you budgeted for debt payments in previous months as your emergency fund contributions. If you are receiving payments from a settlement or an annuity, you also have the option of liquidating them to receive a lump sum, rather than the scheduled payments. In a pinch, this can provide the seed money you need to start your emergency fund.
However you get started, saving some money as you can, is better than saving no money at all.