This article will explain what an emergency fund is, why you need one, and how you may start building one with simple steps and helpful tips.
You’ve probably encountered emergencies or hurdles in your life. These occurrences take you off by surprise and often have financial consequences. A crisis might be as little as a broken furnace or as severe as a health problem that flips your life upside down.
We can’t foresee the next tragedy, but we can plan for it. Putting up an emergency fund is the best way to cope with unexpected events. Now, you may be wondering, how can you start creating emergency funds? What are the things to consider when doing so?
Let’s dive in and look at what an emergency fund is, why it’s necessary, and how to start securing and allocating money for this fund.
In This Article
Emergency Fund Defined
To help you understand the idea of an emergency fund, we need to know what it is first.
The term “emergency fund” refers to money set aside for use in a financial emergency. Having an emergency fund encourages financial stability by providing a safety net that you can use to cover additional unexpected expenses such as medical bills or severe house repairs.
Cash and other highly liquid assets are common assets in an emergency fund. These assets eliminate the need to use high-interest debt choices like credit cards or unsecured loans or jeopardize your financial future by raiding your retirement accounts.
Importance of Emergency Fund
You may ask,” why and how necessary is it to have an emergency fund when you constantly earn anyway?” A well-thought-out financial strategy includes an emergency reserve.
Emergency savings enable you to handle unforeseen needs without using high-interest credit cards or taking out a loan.
You don’t want to suddenly drown in debt or refuse to attend to those unforeseen situations and settle to living inconveniently. With this, the optimum time to start saving for an emergency is now.
People usually set aside money for an emergency fund to assist them in unpredictable circumstances like unemployment and sudden medical operations.
There’s also critical and incidental home and auto repair and a family member’s untimely death or disability. Terrible stuff, I know. But also a reality and uncontrollable, sometimes inevitable.
According to a Bankrate poll, just approximately 4 out of 10 individuals in the United States could cover an unexpected $1,000 bill with their savings.
Also, based on Bankrate’s study from 2021, one-quarter of those polled have no emergency funds. You don’t want to be one of them, right?
Having an emergency fund might provide you peace of mind, knowing that you’ll be able to pay for a major bill if it arises. And I think the peace you’ll gain from saving money is something that doesn’t have any money equivalent.
Building an Emergency Fund
Now that you know what emergency cash is and how critical it is to secure one. Let’s go ahead and look into the various ways to create your emergency fund.
You can find methods of building emergency funds in almost all kinds of financial literacy programs. It will be up to your decision which one or two or more of those you want to use.
The main objective is to have an emergency fund covering three to six months’ costs. Saving money is challenging, especially if you provide for your family and children or are still trying to settle existing loans or mortgages.
Reserving so much money may take a long time, so start with small steps like keeping $5 each day and work your way up to a reserve that can cover several months’ worth of expenses.
Your income and spending will determine your savings target. Focus on having enough money to meet costs rather than replacing your full salary when creating a savings goal.
In an emergency savings account, sole breadwinners, company owners, or people with significantly fluctuating earnings should strive for nine to twelve months’ worth of costs.
Emergency Fund Storage
The next important step to take is knowing where to save your emergency fund. High-yield savings account with quick access and a competitive interest is ideal for maintaining your emergency cash.
Look for banks and credit unions covered by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
Also, online banks are fantastic solutions for your emergency funds because you can’t simply stroll into a bank and get your money.
In addition, online banks usually provide better yields than traditional banks. Find the best account for you by comparing Bankrate, Credit Karma, Lendio, NerdWallet, Credit Sesame, or LendingTree rates.
It’s not always just about the rate of return when it comes to picking a bank. In these cases, compare features and select the ideal bank for you using Bankrate’s bank reviews.
Important Tips
Here are some bonus guiding tips to consider when establishing your emergency cash fund.
Budgeting and Starting Point
It’s critical to know where your money goes to identify strategies to save. Budgeting allows you to optimize your earnings while reducing or managing your expenses. You need to find a tool to assist you in creating a budget.
One practical tool to use is a budgeting app, which may assist you in calculating income and spending and providing a dashboard picture of your financial status.
You may also use money tracking apps or make a spreadsheet to monitor your spending, find methods to save money, and improve your financial situation.
Target Setting
Review your budget and calculate how much you need to save each month to meet vital expenditures like rent, food, and transportation.
Straight to Your Bank Account
Direct deposit removes the need to physically deposit checks or transfer cash between accounts, allowing you to put money into your emergency savings right away.
And that is by automating the procedure. You can save regularly and avoid the urge to spend instead of saving.
Save Incrementally
Increase your emergency fund contribution by 1% or a particular cash amount each month until you accomplish your savings target.
Increasing the amount in tiny increments will assist in hiding changes in your checking account balance.
Extra Income, Extra Savings
If you already have a pretty significant emergency fund in place, you should use at least a portion of every windfall to finance an emergency fund.
Tax refunds, bonuses, financial gifts, inheritances, and winning a competition or the lottery are examples of randomly acquired money.
Keep Saving
Some crises may need a longer buffer than six months.
You’ll be glad to have extra money invested in your emergency savings if you’re jobless for more than a year or hospitalized for many months.
So, keep setting aside cash even after achieving your emergency fund goal.
Bank Account Incentive
Banks typically provide monetary incentives to entice clients to create additional savings or checking accounts. These bank account perks might help you start a cash reserve or contribute to the one you already have.
Last Words
With everything that happened in the past two years in the pandemic, having an emergency fund that earns interest is something we should be doing now if you have started already.
An emergency saving is an intelligent method to save money for unplanned expenses, and it will help you prevent taking on credit card debt or a loan.
Keeping money saved up in a high-yield emergency fund enables you to earn a return while also quickly accessing cash when you need it.
Here are more articles that you may find interesting. You may go over them and get yourself even more informed.
- 21 Essential & Simple Cybersecurity Tips – 2022
- 7 Ways to Become More Self-Sufficient
- Prepper’s Financial Guide (Everything You Must Know)
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