In life, if there's one thing you can bet on, it's unpredictability. And that's especially true in times of economic uncertainty. So, while you can't plan for everything, you do want to do your best to prepare.
Part of that is doing what you can to save funds so you have money if the unexpected happens. On the other hand, if you have a good job, a savings account and are on top of your bills, you may be wondering, why should you have an emergency fund, too?
What Is an Emergency Fund?
An emergency fund is easily accessible money that helps you pay bills and cover expenses when you have a financial surprise.
Some times when you may need to use an emergency fund include:
- If you received unexpected medical bills.
- If you need sudden home or car repairs.
- If your pet gets sick.
- If you lose your job.
If you don't have the money to cover some or all of these costs, it may put you in a challenging financial situation, leading to stress and anxiety.
How Is an Emergency Fund Different From Savings?
You may wonder why you shouldn't keep your emergency fund money in your checking account or your regular savings account. After all, it's still savings.
One of the biggest benefits of having a separate emergency fund is that it keeps that money out of reach for spending on a whim. It's easy to splurge on a new TV or a big trip when you see your savings or checking account is flush with cash.
But it's important to remember emergency funds are for emergencies only. Ideally, you want to have it in a place that's easy to access quickly but mostly out of sight so you don't tap into it for small splurges or general expenses.
Why Should You Have an Emergency Fund?
We've all had moments when a bill or invoice arrives that's more than you expected, or something breaks down and needs fixing immediately. Unfortunately, without your emergency fund, you may have to use credit cards, take out a loan or cash in some of your retirement savings to cover costs.
That can put you behind on your budget and savings goals. Having an emergency fund can help take the brunt of these unforeseen expenses, leaving your primary savings and retirement investments on the right track.
For example, if you lose your job and can't find work for a few weeks, having an emergency fund can help cover your main expenses so you don't have to worry about being late on your mortgage or car payment.
The same goes for other unexpected expenses. For example, you may be in a car accident and need to cover your deductible to get repairs done. You can take money directly from your emergency fund to help cover those costs.
Emergency funds don't always need to cover huge expenses; the money can also help with minor unexpected needs. For example, maybe you cracked a tooth during a weekend away. Having the money available to get to the dentist quickly for repairs without worrying if it will impact your checking account is helpful.
How Much Should You Save?
Experts recommend having about three to six months of living expenses in your emergency fund.
To determine what you need, go through your current expenses and add them up. From there, make tweaks since the exact number you need often depends on your risk levels and financial situation.
For example, you may consider the bare minimum you need to stabilize your living situation and focus on that number. But if uncertainty and risk make you feel uneasy, you may want to aim for more savings.
How To Start an Emergency Fund
Starting an emergency fund is relatively straightforward.
- Determine your savings goals. Start small if money is tight. Pick a monetary amount, such as $500 or one paycheck, and build from there.
- Review your budget. See where you can set aside funds for emergencies. Consistently saving something every week or month adds up.
- Top off your funds if you get extra money, like a bonus at work.
- Try automating your savings so the money pulls from your account automatically.
Many banks offer high-yield savings accounts with a higher interest rate than standard savings accounts. That option can keep your money out of sight and out of mind while still earning a little more in interest.
No one can predict the future. But taking the steps to put yourself in a position where you're more prepared to handle the unexpected never hurts. Building an emergency fund is a great place to start.