Quick Guide: Building an Emergency Fund
An emergency fund, as the name indicates is savings or self-insurance to help cover unexpected expenses or emergencies. Having a stash of cash can keep you from tapping into your investments or going into debt if the unexpected happens.
Examples of times when an emergency fund might be helpful include:
- Car repairs or breakdowns
- Home repairs
- A trip to the emergency room that is not or only partially covered by insurance
- Paying expenses during a job loss
- Leaving an unhealthy relationship
How much should you have in emergency savings?
Advisors typically recommend 3 to 6 months’ worth of living expenses. However, the amount that you keep will be dependent on your circumstances. For example, if your job situation is not stable, or you are considering starting a business from scratch, you might want to save more. However, if you have a partner and the majority of your expenses can be covered by their income, you might want to save less. The key is to zero in on an amount that you feel comfortable with.
If you are just starting an emergency fund, don’t get overwhelmed by the amount. Start with what you have available and add to it as often as possible. If you will be paying down high-interest debt at the same time, an emergency fund of at least $1,000 should cover most expenses. However, without an emergency fund, you risk going into debt to cover unexpected expenses and that could sink your debt payoff plan.
How to build an emergency fund
Get started by saving a little of each paycheck until you reach your goal. Build it into your budget and put your savings on autopilot. Focus on building a fund to cover your essential expenses like housing, food, and transportation, not wants or nice-to-haves.
If you have to use some of your emergency funds for an emergency, make a plan to put the money back as quickly as possible so that it will be there for the next emergency.
Where should you keep your emergency fund?
Your emergency funds should be easily accessible without penalties or possible loss of principal, so consider an interest-bearing savings account. High-yield savings accounts are a good option at this time. Some resources to find high-yield savings accounts include Nerdwallet, Bankrate, and Motley Fool. In each case, your money is FDIC insured and you have the opportunity to earn a higher rate of return.
Avoid combining your emergency funds with money slated for bill paying or other goals so they are not spent accidentally.
When should you start building an emergency fund?
Start now. Having an emergency fund should be a part of your overall financial plan so that if the unexpected happens it doesn’t derail your entire plan.
Got questions about starting, building, or maintaining an emergency fund. We’ve got answers. Visit the PS Worth website for more information. ps!
