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Only 41% of adults in the US would be able to cover a $1,000 unexpected expense, according to a 2020 survey by Bankrate. Having an emergency fund can prevent you from going into debt and help you avoid extra stress when the unexpected happens.
Find out the top 6 questions answered about emergency funds so you can get prepared and use our emergency fund calculator.
What is an emergency fund?
An emergency fund is money specifically saved in case of unexpected expenses or unforeseen circumstances. It should be kept separate from your other savings and only used in case of emergencies.
Why do I need an emergency fund?
Having an emergency fund prevents you from racking up debt in case emergencies arise – which ultimately happens to everyone at some point. This could be due to a job loss, unexpected medical expenses or urgent repairs. If you set aside money in advance, when one of these situations comes up you are prepared and don’t have to rely on credit cards or loans.
About 37% of respondents in the Bankrate survey said they would borrow money to pay for an unexpected $1,000 expense. Instead, you can make the decision now to start an emergency fund so that you can be prepared for the unexpected and prevent unnecessary stress.
How much should I save?
Most experts agree that you should save enough to cover 3-6 months of regular expenses if you were to lose all income. This probably sounds like a lot, but you can start small and save each month to get to that amount. How much you need to save really depends on your unique situation and how many streams of income you or your household has.
Try our emergency fund calculator to see how much you should aim to save:
Emergency Fund Calculator
Use the estimates from our emergency fund calculator to set your savings goals. Dave Ramsey recommends saving $1,000 for an emergency fund at first and then working toward the 3-6 month marks. But don’t stop saving after you reach $1,000! While we agree with this concept, we don’t agree with everything Dave Ramsey suggests. Read our article, Why Dave Ramsey’s Baby Steps Might Not Work For You.
Where do I put my emergency fund?
Your emergency savings should be accessible, but not too accessible. This means it’s probably not the best idea to keep it in your regular savings account as it is too accessible. Also, keeping your emergency savings separate from other savings will help prevent confusion and spending on non-emergencies.
The ideal place to keep your emergency fund is a high-yield savings account that allows you to quickly withdraw your money if necessary. One option is CIT Bank that offers competitive interest rates, so your emergency fund grows faster than if you had it in your regular savings account. It is a member of the FDIC, so your funds are insured up to $250,000. You can also easily transfer or withdraw funds. There are many other high-yield savings accounts, just be sure to read the details to make sure you can withdraw your funds without a penalty.
Learn about different types of bank accounts to find the right one for your lifestyle to help you reach your financial goals.
How do I build an emergency fund?
First, set your savings goal. This can be $1,000 to start or 3 months worth of expenses. Then decide how much money you will allocate to your emergency fund each month. You may even be able to automate the monthly transfers through your employer or your bank account so it’s one less thing to think about.
You can also commit to contributing any financial windfalls, such as tax returns or bonuses, to your emergency savings. Find out a few creative ways to jump start your emergency fund in our article.
You may need to cut costs to be able to contribute to an emergency fund. Take a look at the last couple months of expenses to see what you can cut. Also consider making a zero-based budget which gives a job to every dollar of income, including savings and paying off debt.
When should I use my emergency fund?
The main reason for keeping your emergency fund separate from your regular savings is so that you don’t use it for costs that don’t constitute an “emergency.” Before you use your emergency savings make sure that the expense is unexpected, urgent and necessary. This means that the new TV you’ve been eyeing is not an emergency….
Instead you can use sinking funds to save for expected expenses over time. Such as holiday shopping, a new car or that TV! Learn more in our article, How To Use Sinking Funds To Budget For The Future.
Our Take
We have needed our emergency fund several times, especially after buying our house last year. We had to replace the washer and dryer shortly after moving in, which was expensive! But fortunately, we were prepared and had saved enough that we didn’t have to stress over it or go into debt. That’s really what having an emergency savings is about – stress management and debt prevention. In our eyes, if you can prepare when you have the means to do so then why not?
Financial freedom begins with good habits.
Rebecca & Tiago, theloadedpig.com