What Is an Emergency Fund and How Does it Help Me?

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Unforeseen surprises happen, well … unexpectedly. If anything, this year’s pandemic proved how crucial it is to have an emergency fund on-hand for everything from medical bills to extra toilet paper. But figuring out how to create and manage one can sometimes be confusing. Don’t let a sudden expense ruin your financial progress and make hard circumstances even more stressful. Create a safety net with an emergency fund so you’re able to make confident choices with your money, and stay ready if anything goes wrong.

Call it rainy day savings, an uncertainty account, or safety spending, this emergency fund serves as the bubble between life’s shaky money moments and the cushion that provides you the opportunity to avoid financial crises. 

Here, we’ll talk about what emergency funds are used for, why it makes sense to have one even when paying down debt, where to keep your fund and find money to start one, how much to contribute and when, and how to avoid dipping in for non-emergencies.

What’s an emergency fund and when do I use it?

An emergency fund is cash you save specifically for expenses you don’t expect: medical bills, losing your job, a leaky roof, a death in the family, a pet emergency, an exploding water heater, or a car wreck. Having liquid cash set aside means you don’t have to turn to credit cards or loans during financial stress, and you have peace of mind for surprises.

Why should I have an emergency fund when I’m trying to pay down debt?

It may seem counterintuitive to set aside money for an emergency fund when you’re carrying debt. Shouldn’t you pay down the debt first? Here’s why an emergency fund still matters: When you save with an emergency fund, you prevent future self-sabotage. When a financial hiccup hits, and you already have debt, turning to high-interest credit cards or loans because you lack cash only increases the amount you owe.

Where should I keep my emergency fund?

First, always have your emergency fund in cash. Not a duffel bag under your bed, but virtual cash—money that’s available to spend right away when you need it, without transfers. 

Second, put it in a place where you won’t regularly access it like a separate checking or savings account, or a debit-style account that you can withdraw from, but isn’t easy for you to access on an everyday basis. Anywhere that you’ll resist tapping into the funds that’s FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Administration) insured is a good spot, and if you can set up automatic monthly transfers, that’s even better. Money market accounts or short-term CDs are also an option depending on how much you want to keep in your emergency fund.

How much should I contribute and how often?

This depends on your income level, but start with a small, attainable goal of $500 to $1,000. When you keep the amount doable, you’re more likely to continue to save, and when you’ve reached the minimum, you can work up to the more traditional amount of three to six months’ worth of expenses. If you’re self-employed, consider up to 12 months of expenses to be safe.

If you have a high income and reach the minimum by saving a few hundred dollars per month for a couple months, consider looking ahead to saving for the three-to-six-month amount. If you’re already on a super-strict budget, even $10 per week is a fantastic start to building up your emergency fund. Plus, it’s usually easier to find smaller bits of money each week than hoping for a chunk of change at the end of the month.

Where do I find the cash for my fund?

Tell yourself it’s not “extra” money; it’s money you’re going to need at some point. Then think through where a small amount can come from on a regular basis. 

We’re not going to tell you to skip your daily latte. But here are some places people start from: 

  • Review your recurring expenses and see if there are obvious ones to cancel. The tool Truebill is great for doing this. Ever wish someone would cull through your bank account and alert you of subscriptions you’ve forgotten about? That’s what Truebill does. 
  • Negotiate your phone bill. Sometimes it just takes a call to get a plan that will save a little per month. 
  • Get in the “squirrel” habit. When you get paid, consider automatically tucking away a small amount. Soon you won’t think about it. If you do, and you need it back in your monthly spending, just make the change back. It’s at least worth a try. 
  • Consider a side hustle. It doesn’t have to be an actual job, like working for a delivery service, but it could be. People make money selling things online, answering surveys, getting creative on Fiverr … this list from Entrepreneur has both common and uncommon ideas. 

How do I avoid the temptation to dip into my growing emergency fund?

The most pain-free way is to set up automatic transfers weekly or monthly to an account that you only check every other month or so. Money leaves your account quickly and easily, and is stored someplace that you’re not regularly reviewing, limiting your temptation to splurge. If you want to set up a long-term solution, a CD savings account would work for barring you from dipping in, and boost the return on your saved funds.

Don’t borrow from future you, but rather change your money mindset to understand the emergency fund is to keep you out of trouble, reduce the chances of incurring more debt, and provide a safety net for tough times. Sticking to the financial agreement you made with yourself always feels better than a splurge, and when something unexpected happens, you’ll be relieved you saved for that event.

Find more financial health  info, including budgeting for people who don’t want to actually budget.

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