Sometimes an unexpected car repair, medical bill, or emergency pops up. You can’t avoid these calamities, but you can plan for them by building an emergency fund. We’ll look at how much you should save, the benefits of an emergency fund, and the best places to keep your money safe.
What Is an Emergency Fund?
An emergency fund is cash that you keep separate from your other savings to help you deal with unexpected life events and emergencies. Keep in mind that your emergency fund should be used only for true emergencies. Unfortunately, emergencies happen to everyone, and they can be stressful and costly. Having money set aside can bring you peace of mind while also protecting your savings.
Common emergencies include:
- Car Repairs
- Job Loss
- Death
- Medical or Dental Emergency
- Home Repairs
- Legal fees
- Natural Disasters
Benefits of Having an Emergency Fund:
- Control of your finances.
- Having cash to cover the unexpected.
- Being prepared can help ease stress.
- You can avoid taking on more debt.
How Much Should I Have in My Emergency Fund?
It’s recommended that you have enough money to cover 3-6 months of living expenses. Living expenses include the “must-haves” like housing, auto, groceries, phone, basic utilities, and other essentials. If you’re closer to retirement, you might consider increasing your emergency fund to cover one to two years of living expenses, since you may not always have a steady paycheck.
While you should never keep all your savings at home, having a reserve of $1,000 in available cash is a good idea. In the event of an emergency, such as a natural disaster, banking systems could be down, or you might not be able to use payment apps.
Where Should I Keep My Emergency Fund?
The best place to keep your emergency fund is at a financial institution separate from your other accounts.
Savings Account: All accounts are insured by the government up to $250,000 per depositor. You won’t earn much interest with a traditional savings account, but your money will be easy to access.
Money Market Account: Earns higher interest than a traditional savings account and gives you access to funds through checks, debit cards, and online transfers. Money market accounts are also insured by the federal government for up to $250,000 per depositor, so you can count on your money being safe.
How Should I Use My Emergency Fund?
If you have your fund in a savings or money market account, you should be able to withdraw cash through an ATM or transfer funds to your checking account. If you find yourself in a situation that requires an immediate payment and you can’t access funds, use a credit card and then pay yourself back as soon as possible from your emergency fund. That way you’ll avoid incurring interest charges.
Emergencies come in all shapes and sizes, and it’s smart to be prepared for what life throws at you, whether it’s a repair bill you didn’t expect or a sudden drop in income due to a job loss. An emergency fund can do more than cover unexpected bills. It can also buy you peace of mind, which is well worth the money. Your financial institution can answer your questions and help you get started so you can protect your future and keep your savings safe.
