What is an emergency fund? Why do you need one? And how do you start one and keep it funded? Keep reading to learn ten things about your emergency fund you’ll want to know to ensure you don’t ever have to worry about money again.
What Is An Emergency Fund?
An emergency fund is an amount of money that you keep on hand for any emergencies. Although emergencies can hit at any time, if you have savings available in case something does happen, then it won’t be a huge burden on your finances. Just remember that an emergency isn’t just when your car breaks down or you lose your job – it can also include things like getting married, buying a house, and having children. Put simply: you should always have enough money in savings so that no matter what happens, you are prepared.
How Much Money Do I Need To Set Aside
How much you'll need in your emergency fund will depend on how much risk you're willing to take with your money. Some people aren't comfortable keeping more than $1,000-2,000 in their emergency fund because they're afraid of losing it if they have a major emergency. But if something goes wrong, or if a major emergency strikes and you don't have enough savings, that's when things can go from bad to worse. While it might be tempting to put less than $5,000 in an emergency fund — or even less than $3,000 — try not to take too many risks with your money. Set aside what you think is a reasonable amount so that you don't face any big problems down the road.
Where Should I Put My Emergency Savings
Where you should keep your emergency fund depends on how much you have and what kind of risk you're comfortable with. The safest option is a savings account; unfortunately, it’s also one of the least convenient. If you put your money into a regular savings account, expect to pay fees and minimum balance requirements that could reduce your savings by 1% or more over time. Checking accounts are more flexible but carry higher risks—more banks are starting to charge for overdrafts and banking fees overall, too. In many cases, an online high-yield savings account can be a good middle ground: FDIC-insured but still accessible from anywhere in less than five minutes. Consider getting one just for emergencies.
When Should I Use My Emergency Savings
Should I tap into my emergency savings during an emergency? When should I use my emergency fund? In a perfect world, you'll never have to. But when bad things happen, they tend to happen all at once: The furnace breaks and needs repairs; your car dies; you get sick. It's important to know what your priorities are in these situations and determine if your current balance is adequate enough. If you don't have a plan for emergencies, it's okay—but be careful not to let yourself sink too far into debt as a result of bad luck (or poor planning). Remember: The point of an emergency fund is to protect against unforeseen disasters; it's not intended as extra money for new things or big expenses.
What Happens if I Don’t Have An Emergency Fund
Without an emergency fund, you’re essentially putting yourself at risk. Emergency funds serve a couple of functions; first and foremost, they give you peace of mind. An emergency fund is there for when unexpected expenses pop up—think car repairs or a medical bill that isn’t covered by insurance. It can also help you sleep easy at night knowing that if something happens (like your car breaks down), you’ll have money set aside for it. The other benefit is psychological: An emergency fund helps remind you that your financial situation is actually okay—no matter what happens in life, everything will be okay if you don’t have $1,000 set aside somewhere in case of emergencies.
How Will I Know If I Can Afford Something
If you’re like most people, you use your credit card a lot. You see a new item, and instead of saying I don’t have money for that right now, you charge it and deal with paying it off later. Will I Know If I Can Afford Something by doing an inventory of all your debts (you can find all your bills in one place with any budgeting app) and comparing that against how much you have available on any given day. If there’s more debt than cash-on-hand then technically you can afford anything in theory but not everything in practice.
Just because you have it doesn’t mean you have to use it
Having an emergency fund doesn’t mean you have to use it. In fact, unless you’re on a tight budget or otherwise struggling to get by each month, it probably means you won’t have to use it at all. After all, emergencies rarely strike when we can least afford them; they tend to strike at times when we have more than enough money on hand—like right before payday! So don’t be afraid of your emergency fund; instead, keep it safe and save for an even bigger one down the road.
How Many Months Do I Have To Save
It’s a simple question: How many months’ worth of expenses should I save up in case of emergency? Unfortunately, there isn’t an easy answer. But here are ten things you need to know about your emergency fund. This will help you calculate how much you should have saved and what makes sense for your situation. Put another way, use these 10 things as a guideline so that you can decide how much money is right for your situation and what it means to be prepared.
Using Categorization in Saving For Emergencies
Making saving for an emergency fun doesn’t have to be hard. Set up a jar or use a piggy bank and every time you get paid, put some in there. Categorize it so that even if your power goes out, you can still afford part of your rent and food expenses until you find another job. In other words, not being able to cover all your bills is a great reason to save money. As an added benefit, having money in at least one category (emergency fund) will allow you flexibility with other categories as well—use that trick for clothing or vacation savings.
Keep Track Of The Goals You Set
Create a dedicated emergency fund. Having enough money in an emergency fund is a key step toward building a responsible, personal financial plan. Ideally, your emergency fund will be at least three months of living expenses—but it's probably better to shoot for six months just in case. Keep track of your goals and take time every month to review your progress against them. For example, if you have $5,000 in your checking account and $1,000 in savings but want to save up $20,000 by next year to buy a car, you'll need to contribute $333 per month—but you can set that amount aside automatically so it happens without you thinking about it.
Conclusion
Money doesn’t grow on trees, but you can get access to it quickly if you need it. An emergency fund is just that—money set aside in case something unexpected comes up (like an earthquake or a medical emergency). What happens if you suddenly find yourself without any cash? In some cases, such as finding out your child has cancer, there’s no time for savings; in others, like being laid off unexpectedly, saving money may not be possible.
