But having an emergency fund â even a little more cash â can save you money and your emotional sanity all at once. Hereâs why you should stash money away and what your emergency fund size should look like.
An emergency fund is money youâve put away in case of an emergency. Using money you have saved up prevents you from taking out a loan, paying with credit cards or borrowing money from friends and family. You might need an emergency fund for:
An emergency can derail your finances when youâre not sufficiently prepared. You could lose your car or even your home if you donât have the funds to pay for an emergency expense. While credit cards can be a helpful crutch when used responsibly, you could get stuck paying them off for years if you donât have an emergency fund set up.
The amount you should stash away comes from your income, expenses and how much you could live off of if something major were to happen to you.
Itâs generally advised to have three to six monthsâ worth of expenses saved to cover an emergency. But since everyoneâs expenses are different, that number varies from person to person. It may take a long time to save six monthsâ worth of living expenses, but youâre not expected to hit that number right away. Start with a small, attainable savings goal that you can build up over time, as income allows.
There may also be some instances where youâd want to save more than the recommended amount. For example, if youâre a government employee who doesnât get paid during a government shutdown, you may want to beef up your emergency fund. Or, if your parents are baby boomers at or nearing retirement, you may need additional funds to care for their needs.
Get started by saving $20 from each paycheck. This can be hard if you donât have any additional money and youâre already trying to make ends meet. See if you can shift your budget by including a line item for paying into your savings. Following this strategy (Assuming you get paid twice per month) will create $120 in savings in just three months. Try to reach $1,000 within the first two years of saving ($41.67 per month for 24 months) and move up from there.
If you get a raise at work, you should put the difference in your emergency fund and treat it as if you didnât get a raise at all. You could put other âone-offâ income streams directly into your emergency fund as well, such as tax refunds or bonuses. It may not always be easy, but it will always be worth it.
Automating your savings is a great method for saving because itâs âout of sight, out of mind.â If you donât know the money is there and you arenât anticipating it, you wonât get the itch to spend the extra cash. Think about setting up auto transfers from your paycheck or direct deposits from your bank account to go towards your emergency fund.
If youâre slowly growing your fund, you may never stop making small contributions here and there, or as often as your income allows. Itâs a safety net you should always strive to widen. If you ever go through a job loss or have immediate family needs, your safety net will be there to catch you.
You can determine how much your emergency fund needs with a savings calculator. Using a calculator can show you what your emergency fund should look like and how long itâll take to save your ideal amount.
Itâs important to keep your emergency fund separate from the funds you use for regular expenses. Maintaining separate accounts will provide a clear view or whatâs in savings and whatâs available for you to spend. So where should you keep that extra money?
A basic savings account is a simple and common solution for stashing your emergency fund. When searching for a bank, youâll want to consider the following features:
Finally, you might consider investing your emergency funds via an investment account or a money market accountâbut those can be risky. Your emergency savings is there for emergencies while your investment accounts are there to make your money grow (thatâs the goal, at least) over time. However, your emergency fund shouldnât be placed in risky investments as youâre counting on this money for emergencies.
It may seem daunting to reach your savings goal when you first begin building your emergency fund. Rather than feeling like thereâs no end in sight, try focusing on small accomplishmentsâlike meeting your weekly savings goal.
While building up your emergency fund is a wise choice (especially if you donât have one), donât let it take away from other necessities such as retirement savings, debts and your general cost of living (but donât splurge!).