Emergency Fund: Who, What & How

You’ve heard the old saying, “expect the unexpected”. Nothing could be more true. You never know when a major event like job loss, sudden illness, or a large home repair will occur. Unexpected events can cause huge financial burdens and stress if not planned for in advance. An emergency fund helps you prepare for some of those unexpected occurrences and reduces some of the financial burden. This post will discuss the who, what and how of an emergency fund.

SAVING FOR THE UNEXPECTED

Who needs an emergency fund?

Everyone needs emergency money regardless of income. Unexpected events and expenses can be financially catastrophic to anyone. Emergency fund amounts will vary based on income and monthly expenses, but emergency fund accounts are a must for everyone.

What is an emergency fund?

This fund is a separate account dedicated for unexpected expenses. This account is not for vacations or to help pay for everyday expenses. It is also not to be included in retirement planning or for general savings. This account is for unplanned expenses like major appliance replacement, major car repairs, medical expenses or job loss.

The emergency fund is cash savings that is easily accessible. Emergency funds are usually kept in interest- earning savings accounts or money market accounts. You should be able to quickly access your money and not have to pay a penalty for withdrawing money early (like IRAs or CDs).

An emergency fund is enough money to cover 3 to 6 months worth of expenses. This amount enables you to cover your expenses if you lose your job or have a major unexpected event.

How do you build an emergency fund?

Here are 6 simple steps you can take to begin to build your emergency fund account:

1. Know your numbers. Calculate your monthly expenses and determine how much you need each month to cover all of your bills.
2. Set a goal. Take your monthly expenses that you calculated in step 1 and multiply that by 6. That will give you the total emergency fund goal amount.
3. Create a savings plan. Plan how much you will set aside each week or each pay period to put into your fund. If your employer offers direct deposit, set a portion of your paycheck to automatically transfer over to your emergency fund. Remember to keep your emergency account separate from your savings account.
4. Save your change. Create a savings jar for spare change at home. Drop your spare change into the jar and when the jar is full, deposit the change into your emergency account.
5. Save your tax refund and work bonuses. If you receive a tax refund, deposit it into your account to replace used funds or help you reach your emergency account goal. Additionally, if you get a bonus check, place that money into your emergency account as well.
6. Reassess and adjust savings accordingly. Have you reached your goal? If so, stop adding money into the account and begin saving that money in a different savings or retirement account. If you used some of the emergency money, add to your account until you’re back up to the goal amount. Review your account routinely to ensure you always have the goal amount in the fund. Each year, review your total expenses. If your expenses have increased, you will need to increase the amount you keep in your account.

Plan for the Unexpected

Unexpected events can lead to devastating financial burdens. You can ease some of that financial sting with advanced preparation. Having an account with enough money to cover 6 months worth of expenses will help ease your financial burdens caused by job loss, sudden illness or accident, or major home/car repairs. Be prepared for the unexpected by having an emergency fund.