An emergency fund is a savings account for unexpected situations. It offers peace of mind and personal freedom. The money in emergency funds can pay for unexpected expenses and for basic living expenses while income sources are interrupted. It’s not meant to cover additional purchases or luxury goods.
Emergency funds are liquid accounts making them easy to access when unexpected situations happen. Emergency funds can be in a savings account, money market, and quite possibly in brokerage accounts. The purpose of an emergency fund is to ensure financial security during uncertain times. The alternative would be to take on debt that can lead to financial stress.
Types of emergency savings funds
The two types of emergency savings are the rainy day fund and the opportunity fund.
The rainy day fund
A rainy day fund is exactly how it sounds. It’s used for rainy days which are moments like a flat tire or an unexpected unpaid medical bill. I recommend having at least $500 in a rainy day fund or the amount of your auto insurance deductible.
The opportunity fund
The opportunity fund is for the time when you lose your job, hours are reduced, or you’re hospitalized. At least 6 months of basic living expenses should be saved to support you during a “no income” period. It’s called an opportunity fund because of the time you get back, since you’re not working, to explore new job opportunities with little stress.
Don’t have an emergency fund?
Start small and build the account with automatic savings transfers each pay period. Start a savings habit with as little as $5 and incrementally increase as you begin to adjust priorities. Ideally, the more you save the faster you’ll reach your goals.
Starting an emergency fund is easy as most financial institutions allow you to open a savings account and customize the name. Give them names Like “$1000 Rainy Days” or “6 Month Opportunity Fund $9,000”. The purposeful names may help you from withdrawing money for unrelated needs.
How to start saving for emergencies
- To start the two emergency savings account, open accounts at your bank or credit union. You can ask to have this account renamed as mentioned above.
- For the rainy day fund, goal yourself to save at least $500 or the amount of your auto insurance deductible.
- For the opportunity day fund, total your basic monthly living expenses and multiply by 6 (months) to get your target goal.
- For both funds, set automatic transfers or deposits into each account until you’ve reached your targets.
- Replenish your funds as soon as you can after each use.
- Review and revise your funds as your life and money situations change.
Some considerations: Consider reducing your basic monthly living expenses to reduce the amount of money you’ll need in case of job loss. Additionally, find ways to make more money using all income from those gigs to fund these accounts.