No matter how well you think you’ve prepared for the future, things will happen that may require money to fix or a quick trip to the ATM. If you don’t have enough money in your emergency fund, you could end up in a very nasty situation. Taking a few minutes to set up an emergency fund will be the best way to ensure you’re ready.
If you’re in need of a little extra cash, or just need a place to stash a few extra dollars, this category will help you get started. From emergency fund basics to helping you decide on a good investment, this post will have you covered!
When life hits you with a financial crisis, most of us have a few questions to ask ourselves. How can I pay for my emergency bills? Could I get a mortgage? What about car insurance? What about my credit card payments? Is there any way I can keep my home? Long story short, you can’t. Not unless you have a savings or emergency fund.
The effects of the coronavirus have reminded many of us of the importance of an emergency fund. Job loss and medical expenses are just the tip of the iceberg when it comes to why you need an emergency fund. Yeah, I’m talking about , you’re talking about! But you may need more details to get started. So consider this item Emergency Fund 101. I answer the most pressing questions about emergency funds and explain the basics so you can build your emergency fund with confidence. Building an emergency fund was a top priority for me when we were newly married, and it has been a great blessing to us over the years, so I hope you will make the effort to build it for yourself. Before we dive in… I offer free printables to help you pay off debt and reach your savings goals! You can use the Savings Goal Thermometer to track your progress in building an emergency fund. If you can see the progress you are making toward your financial goals, it will help you succeed. Fill in your details below to get started.
What is an emergency fund?
It is simply a sum of money that you set aside in case of emergency. You see, usually we can’t predict emergencies, but we know they will happen eventually. The contingency fund thus provides room for the unknown. I can tell you from personal experience that emergencies are much less stressful when you don’t have to worry about the financial side of things.
How much money should you put into an emergency fund?
Yes, I will give you specific advice, but first let me say that anything is better than nothing. Setting money aside for 3-6 months may seem impossible, but don’t let that stop you from setting something aside. In case of an emergency, you will be grateful for any amount of money you have available. According to most experts, you should aim to have the equivalent of 3-6 months’ worth of money in your emergency fund – strictly speaking, expenses, not income. So if you earn $3,000 a month but your mandatory expenses are only $2,500 a month, your goal would be to save $7,500 to $15,000 instead of $9,000 to $18,000. Does this make any sense? So what to do: wait three months or six months? Because there’s a big difference! It really depends on your life situation.
Some factors to consider:
- The general health of you and your family members
- your job security
- If you receive a fixed salary or have a variable income
- Your comfort level
We try to keep a six-month emergency fund, because Austin and I both have health issues, my income fluctuates a lot, and I’m a troubled person, so I feel much more comfortable with a larger emergency fund. Everywhere, again for those of you in the back seat: Anything is better than nothing.
What should I invest my emergency fund in?
It is best to put money for emergencies in a savings account that earns a small amount of interest. Currently, many banks offer an interest rate of 1.5 to 1.7%. It’s not much, but it’s something. You want to have the money quickly when you need it, but you also want to avoid using it for non-urgent needs. If you think you or your spouse will be tempted to spend the money in the emergency fund when you shouldn’t, you can put it in a savings account at a different bank than the one you usually use. It takes a little more effort to get the money that way. Don’t put the money in your checking or savings account either. And don’t use the emergency fund account for overdraft protection. These measures guarantee their safety.
Is it worth it?
That’s a lot of money, and you might be tempted to invest it for a higher interest rate than a savings account. Leave it.
- You want to have this money easily and quickly at your disposal. This is not possible with most investments.
- Depending on where and how you invest this money, you may incur penalties when you withdraw it.
- It’s risky. Yes, you can earn more interest, but you can also lose money.
You should have a completely separate investment/retirement strategy from your emergency fund. Keep the money safe in a savings account.
What is your emergency fund for? What is an emergency?
Your emergency fund is for real and serious emergencies.
Some examples of the use of the contingency fund
- job loss
- Serious medical emergency
- Car Accident
- Necessary repairs to your home (for example, if your heating system breaks down in the middle of winter).
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Dave Ramsey recommends using your emergency fund for things that are unexpected, necessary, and/or urgent. Don’t forget that there are many predictable releases that only pop up occasionally. These are not emergencies. The cars are breaking down. Predictably, this will happen. Ideally, a deferred fund rather than an emergency fund should be used to raise funds for these types of repairs. Learn all about creating zinc funds.
Definitely in category Not Emergencies:
- Vacations and all types of travel without urgency.
- Christmas presents. Christmas is pretty predictable. Use a savings fund for this purpose.
- Annual bills such as taxes, insurance, etc.
- Great deals.
How to save for an emergency
I know that if you’ve just calculated your expenses for three months, you’re probably a little baffled at the thought of accumulating such an amount. I’ve been there.
Some points to remember
- It’s okay if it takes a while. You can save up a hefty sum of money, and then use some of it in an emergency and feel like you’re back to square one. Keep up the good work. When I started saving for our emergency fund, there were months when I was lucky if I could only add $20 to it.
- Confirm mini-reading on the trail of a perfect number. Your ultimate goal may be $10,000, but for now you’re only working on the first $2,000. This is great! Baby steps, everybody.
- Anything is better than nothing! Yes, this is the third time I’ve said that, and it’s because I mean it. A few hundred dollars in a separate savings account is a good start. Do what you can.
And where will you get all that extra money? I have ideas!
- Direct deposit. Your employer should be able to deposit a portion of your salary directly into an emergency fund account. If this is not possible, you can set up an automatic transfer from your regular bank account to your emergency fund account on payday.
- Your tax return (or Covid 19 stimulus money). I know it’s tempting to spend it, but the peace of mind you get from saving a hefty sum of money right away is worth the sacrifice.
- Care for children or pets.
- Sell the things you don’t need.
- Give up unnecessary expenses for a while to free up money (restaurant fees, streaming services, monthly membership dues, and so on).
- Stay within your budget! Seriously, if you don’t keep a budget now, you’re probably spending more each month than you realize. Let me help you get started here.
Did this answer all your questions? Are you ready to save money? Or maybe you already have an emergency fund, but decide to increase or move it. Whatever you need to do, I hope you make it a priority because emergencies happen and you will never regret having an emergency fund.
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It’s the middle of the month, and you have bills to pay. You dread the thought of having to dip into your emergency fund, but you know you need to keep that money in the bank for a rainy day. You also know you need to keep a budget, but it feels like you’ve been doing that for years and it isn’t getting any easier.. Read more about emergency fund or house down payment and let us know what you think.
Frequently Asked Questions
How much should you have in your emergency fund?
First and foremost you’ll need to know the basics. If you’re reading this article, you’ll know that there are two types of emergency funds: a rainy-day fund and a retirement fund. The rainy-day fund is designed to cover short-term expenses that may arise—things like your car breaking down, a major emergency room visit or even a sudden layoff. This fund should cover a few months of living expenses, but should not exceed three months. If you’re anything like me, you hate the idea of being unprepared for an emergency. That’s why I spend hours every week researching ways to save money and grow my emergency fund. But what if I told you that I’ve compiled the ultimate guide to emergency fund goals that won’t take a lot of your time or money?
Is a $1000 emergency fund enough?
It’s been a week since Hurricane Irma hit Florida, and one thing’s become clear: not everyone has the money to get back on their feet in the event of another disaster. In fact, many Floridians are still in the dark about the massive damage the storm has wrought throughout the Sunshine State, which is only set to get worse as the death toll rises. You don’t have to have a lot of spare cash in the bank to be financially secure. In fact, a few hundred dollars can do a lot to protect your family’s needs in the event of an emergency. Not all emergencies are the same, of course. Some are absolutely dire and require immediate relief. Others will have you waiting a few years before you can get back to normal. And some emergencies only need a small amount of cash to resolve.
Is 5000 a good emergency fund?
The goal of an emergency fund is to survive life’s bumps and bruises. You may have never had to use it, but if there is ever a time to use it, it is when you need it most. Can you afford to wait until you have enough money saved to cover emergencies? If you don’t think so, read on. This emergency fund is made up of three savings accounts, but only one of those accounts is a savings account: the other two are CDs. The CD with the highest interest rate provides 5% interest, while the second one has no interest, only a small 1% fee; these interest rates are so low, they are no longer considered savings accounts. The account with the 5% interest rate is called a CD ladder, and it’s essentially an investment account that makes small deposits over time. Ladders like this are great for emergency funds, but are not always the best option for all people.
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