Could you afford to pay a $400 bill if it came as a surprise?
According to a recent YouGov research for the Economic Security Project, 40% of Americans don’t have $400 in savings set aside for unforeseen expenses.
Even fewer people undoubtedly have that much set aside in an emergency fund for greater expenses.
What exactly is an emergency fund then? What portion size is ideal for one? Where should you store the cash, too?
Main Points
- Nearly half of all Americans claim they wouldn’t be able to cover a $400 unforeseen expenditure.
- A safety net for “unexpected” costs is provided by an emergency fund.
- An emergency fund should, as a general rule, be sufficient to cover three to six months’ worth of expenses.
- Automating your emergency savings can be done in a number of ways, such as by having a portion of each salary placed into your emergency fund.
- Even if the account has a low interest rate, emergency savings should be kept in a safe and secure location.
An emergency fund is what?
An emergency fund is money set aside for just that—emergencies. It could be used to pay your deductible in the event of a car accident, to repair your home or buy a new refrigerator if yours breaks down, or to get you by while you look for work if you lose your job.
It is not a bank account that you frequently withdraw money from to pay regular, expected bills. It really does exist for unforeseen costs.
Consider it a safety net or a buffer: one that can protect you from serious financial repercussions.
What Justifies Having an Emergency Fund?
A financial catastrophe could result from any unforeseen expenditure if there is no emergency fund to provide protection.
Even for those with outstanding credit, racking up credit card debt or skipping payments due to an unexpected emergency can swiftly lower a credit score.
Furthermore, recovering from a serious financial setback may take months or years, or it may even result in bankruptcy.
Having a sizable emergency fund also has important psychological advantages. You might be able to sleep easier at night knowing that you have greater financial flexibility to make the choices that are best for you and that you have a safety net in place in case the worst happens.
The business reports layoffs? You won’t be as stressed out and don’t have to accept the first job offer you get because you have a safety net while looking for a new position.
How much should you put aside for emergencies?
A good emergency fund should have enough money in it for most people to cover costs for three to six months. The generalization will change, though. You might require less money in your emergency fund if a spouse or other family member contributes to a portion of the household income. You may want to set away extra money if you are financially responsible for someone else, such as a child, if you work in a volatile field, or if you work for a company with a high turnover rate.
Last but not least, what would it take for you to be stress-free and not worry about an unforeseen expense? Some folks have enough money set aside for emergencies to last them a whole year. How your emergency fund fits into your financial life will determine everything.
I should keep my emergency fund where?
Money in your emergency fund needs to be safe and secure. Safety also entails no risk. Your emergency fund is intended specifically for emergencies. Therefore, you should ensure that it is accessible (liquid) in case something unforeseen occurs.
Your emergency fund is an essential component of your financial planning, which also includes setting aside money for significant goals, paying off high-interest debt, getting adequate asset protection through insurance, and putting a simple estate plan in place.
Although interest rates are currently low, keep in mind that safety, stability, and a predictable return are your emergency fund’s top goals. Find high-yield savings accounts online. In addition to allowing you quick access to your emergency fund, this also offers a far greater interest rate than the majority of banks, which is often around 1%.
They are simple to set up and FDIC insured up to $250,000 (per person). Here is a wonderful place to look for a high return savings account.
How do I increase my emergency fund?
Start building your emergency money. ASAP, even if you have to make little strides. Have a portion of your paycheck placed into your emergency fund before you even see it if your employer enables direct deposit to more than one account. If not, develop the mentality of “paying yourself first” and set up a recurring transfer from your primary bank or credit union account to your emergency fund each pay period. Again, even if it isn’t much at first, make it a habit to consistently add money to your emergency fund.
Consider developing a side hustle to increase the amount you can afford to set aside for your emergency fund. Whether you drive, deliver, sell on Etsy, paint someone’s house, or turn a hobby into a side business, having a second source of income might make it simpler to accumulate a sizeable emergency fund. Set a weekly goal for how much of your side business you will contribute to your emergency fund.
Building an emergency fund may be incorporated into your overall planning, and a CFP® Professional at Facet Wealth can show you how to manage and prioritize each aspect of your planning. Schedule a free, introductory call right away to take the first step toward achieving greater financial peace of mind.
