Building an Emergency Fund Article
Many Americans live paycheck to paycheck with no funds available for emergencies. One of your first financial goals should be building a cash reserve, or emergency fund to cover the financial surprises life throws your way.
Your emergency fund will allow you to tap into your cash reserves instead of paying with credit cards, skipping payments and bills, or selling assets.
How much money to save
Short-term emergency fund
The purpose of a short term emergency fund is to cover smaller urgent situations such as car or appliance repairs. Start with a goal of having $1,000 in your savings within a reasonable amount of time. You may be able to sell some belongings or look for ways to cut expenses to begin your savings. From there you can determine how much you will need to save each month to achieve your goal and set up automatic payments to your emergency savings from your paycheck. If you keep it up, over time you'll be surprised at how quickly you can meet your goal. The important thing is to start saving something today!
Long-term emergency fund
Experts recommend saving at least 3 to 6 months worth of essential living expenses in a longer term emergency fund. This includes critical expenses such as, housing, debt repayment, food and transportation in the event of job loss, unexpected housing repairs or a medical emergency. As long as you have your short-term emergency fund available, you may want to consider putting your long-term emergency savings into an account or reliable investment vehicle that earns a higher interest rate, but may be slightly less accessible.
Where to put your money
When it comes to your emergency fund, you’ll want to choose options that are:
- Safe from market risk. Feel confident that your money will be there when you need it, especially in times of economic or market instability.
- Easy to access. This is essential so that you’re able to take care of your emergency quickly.
- Interest-bearing. Although the point of an emergency fund is not to make money, don’t turn down the opportunity to earn interest on your savings.
Emergency fund tips and reminders:
- It’s also wise to put your emergency funds in an account separate from your everyday savings – “out of sight, out of mind!”
- Once your emergency account is fully funded, consider putting a portion of it in a savings certificate that will earn a better rate. Choose a shorter term of deposit, so the funds remain accessible.
- Remember, if you have to tap into your emergency fund, repay it as quickly as you can.
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