An emergency fund is a savings account for unexpected expenses. It offers peace of mind and personal freedom. The money in an emergency fund can pay for living expenses while income sources are interrupted. It’s not meant to cover additional purchases or luxury goods.
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 get to the 6-9 months financial cushion.
Starting an emergency fund is easy as most financial institutions allow you to open up a savings account and title it an “Emergency Fund.” The title will be a visual reminder.
Emergency funds are liquid accounts making them easy to access when the emergency happens. 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.
Reasons why you should have an emergency fund
- medical emergency
- job loss or hours reduction
- sickness or death
Establishing an emergency savings fund is extremely important and must be part of any financial planning. Emergencies happen. It’s not a matter of if, but a matter of when the emergency will happen.
Prioritize savings for an emergency fund that contains at least 6 months of living expenses.
How to Start an Emergency Savings Fund
- To start an emergency savings account, open an account at your bank or credit union. You can ask to have this account labeled as an Emergency Fund (you might be able to do this yourself online).
- Determine the amount you need to save by listing each monthly expense (and quarterly expenses) and totaling the amount. This is the amount of money you need each month in the event you lose your job or get sick and unable to work.
- Save 6 times the monthly expense amount. Some financial experts recommend up to 9 months. The lower your monthly lifestyle expense the lower the amount you’ll need to have in the fund.
- Set automatic transfers or deposits into the emergency account until you’ve reached the desired number of months.
- Make adjustments when your monthly expenses change.
- Replenish the emergency fund as soon as you can after each use.
If you find it difficult to save make adjustments on your spending and cut down on expenses. Saving as little as $5 and incrementally increasing the amount per week will help you gradually adjust.
Warning: Make sure you don’t touch your emergency fund to buy things you’ve budgeted for such as groceries, utilities or fixed expenses. Don’t use the fund to buy that nice pair of jeans either. That’s not an emergency.