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Building an emergency fund

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Life is unpredictable, and not all surprises are good ones. Your car could break down. You might get laid off from your job. You or someone in your family may need medical care. Having an emergency fund to pay for unexpected expenses can help you navigate the emergency without adding a layer of financial stress.

But when your budget is tight already, how do you save extra money? In this article we’ll look at how to build and maintain an emergency fund to get you through tough times.

Here’s what we’re going to cover:

  • Why do you need an emergency fund?
  • How much money should I have in my emergency fund?
  • Where should I keep my emergency fund?
  • How do I grow my emergency fund?
  • A safety net for the future

Key takeaways

  • Having funds set aside to use for emergencies can give you peace of mind and help you get through difficult times.
  • Experts recommend keeping three to six months of regular expenses in your emergency fund.
  • As your life and finances change, you’ll want to adjust your emergency savings to reflect your circumstances.

Why do you need an emergency fund?

Emergencies happen to everyone. If you rely on a credit card or a loan to help with expenses at times like these, you could end up owing a lot of money in interest and fees.

A better solution is to prepare for the unexpected by starting an emergency fund. Having money set aside to use on these occasions can give you peace of mind and help you get through difficult times.

How much money should I have in my emergency fund?

Many financial experts recommend keeping three to six months’ worth of living expenses available. You’ll want to calculate your rent or mortgage, groceries, gas, utilities, insurance, and any other bills you pay regularly. If your car is old or your appliances need repair, you may want to put aside even more.

Knowing that you can get along for several months on your emergency fund lets you breathe easier when a crisis comes up.

Where should I keep my emergency fund?

An account with a bank or credit union is a safe place for your emergency fund because your funds will be FDIC insured up to $250,000 (you won’t lose the funds in case of fire, robbery, etc.).

Set up a special account separate from the rest of your money. You can give it a name like Emergency Fund or Rainy Day Savings so you remember what this account is dedicated to.

A savings account is a good choice, especially if you can earn interest on your money. A checking account works fine too, as long as you don’t use it to pay your regular bills. Just be sure you have easy access to your funds, but they’re separate enough that you aren’t tempted to spend the money on non-emergencies.

How do I grow my emergency fund?

Saving a small amount at a time is a good way to get started. The sooner you start, the more likely you are to have reached your savings goal by the time an emergency happens.

Consider setting up automatic deposits from each paycheck into your emergency account. Even if you only set aside a few dollars a month, it’s an easy way to make progress.

You may also want to deposit random influxes of money into the account, things like tax refunds, bonuses, or cash gifts.

Some apps allow you to “round up” to the next dollar when you make purchases, and the extra cents get deposited into your emergency fund. Others will help you put savings on autopilot.

It can be hard to get started, here are four reasons why and how to overcome them. You can even save if you’re on a tight budget.

Remember that you’re keeping this money safe to use for situations when you really need it, such as a medical emergency, the loss of your job, or major repairs to your home or car. If you do have to withdraw money at times like these, try to pay it back into your emergency fund again as soon as you can.

A safety net for the future

Your circumstances in life will change from time to time. You may get married or have a child. You may earn more as you advance in your career. Maybe you’re nearing retirement age or need medical care. The amount of money you keep in your emergency fund should reflect what’s going on in your life right now and what is likely to happen next. An emergency fund is a smart way to be prepared for whatever the future brings.

 

Sources

Consumer Financial Protection Bureau. An essential guide to building an emergency fund

NerdWallet. Emergency fund: What it is and why it matters

Experian. How much money should you have in your emergency fund?

Bankrate. The best places to keep your emergency fund

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