In the event of an emergency, would you have enough money saved to keep you and your family afloat, to help you weather a challenging few months, or to help you pay an unexpected expense? An emergency savings account is like an insurance plan—you hope that you never need to use it, but having it could save you from major financial hardship. What’s more, an emergency savings fund can save you from relying on interest heavy credit cards, which can come with interest rates as high as 22%.
To be clear, however, an emergency fund is different from other savings funds in that it is intended to cover unexpected expenses, such as a large medical bill, major home repair, or layoff. It’s not the account you would use to save for holiday gifts or a family vacation.
Knowing how much you need to save in an emergency fund depends on many things, among them:
- your current expenses
- the number of dependents or family who rely on you financially
- whether major expenses such as your home or cars may be older and soon in need of repair or major maintenance
- if you work in an industry in which employment can be cyclical
- if you are retired or on a fixed income
All of these life circumstances can affect both your likelihood of experiencing an emergency financial situation and your ability to pay for a major unexpected expense.
Most financial experts, including those at Fidelity, suggest aiming to build an emergency fund that could cover three to six months’ of living expenses. Those living expenses include:
- Rent or mortgage payments and utilities
- Basic groceries
- Health care
- Insurance premiums
- Child care and/or tuition
- Transportation
- Minimum debt payments
Of note, the above living expenses do not include “extras” such as gym memberships, entertainment expenses or vacations, to name a few. These “extras” are not typically built into an emergency fund.
Building three to six months’ of living expenses may not be easy but it is doable when you break it down into manageable steps. Try building up $1000 in savings as a first step and then grow your emergency savings from there.
Fidelity makes the following suggestions for building an emergency fund:
- Think of your emergency fund as a monthly bill so you consider it an expense you are obligated to pay.
- Make automatic contributions such as a direct deposit from your checking account to your emergency savings account.
- Put all unexpected incoming money, such as a tax refund, credit card rewards or a bonus, into your emergency savings account.
- Direct any pay raise you may receive into an emergency savings account and use that difference in pay to boost your savings.
- Cut expenses, such as subscriptions or memberships, and redirect the money you were spending on those things into an emergency savings account.
- Always replenish what you may have used out of your emergency savings account.
Not only is it important to have an emergency savings account, it’s also important to have that money saved in the right place. Your emergency savings account should be in an account in which you can access it easily and without penalty. This is called a “liquid” account, an account where your savings can easily be converted to cash when you need it.
Financial security comes from knowing you can weather financial life events and an emergency fund gives you that peace of mind.
Go to https://www.ewtf.org/individual-account-plan/plan-overview/ for more information.
on your Individual Account Plan.