An emergency fund is a separate place you save money only for an emergency. You shouldn’t think of it as part of your other finances and savings accounts.
It provides a safety net if something unexpected happens and you need quick cash to pay for it. Having an emergency fund helps prevent you from taking on more debt to cover the unexpected.
Unfortunately, many Americans have very little saved to cover emergencies. Creating an emergency fund is the first step towards a healthy financial present and future.
The Size of Your Emergency Fund
Figuring out how much you need to save for an emergency fund doesn’t have to be tricky.
The general rule of thumb is that you should have between three and six months of expenses tucked away. If you lose your job or need to cover your car breaking down, you won’t go broke.
That means if you have $2,500 per month in expenses, your fund should be between $7,500 and $15,000.
To figure out how much you need, add up all your essential monthly services. This includes:
Internet and Phone
Car and Health Insurance
Anything else you pay monthly
Your emergency fund should easily cover these things if you lose your job. And if a big expense comes up like a medical bill or a home repair, your emergency fund should be big enough to cover it.
How Much Should I Be Saving?
There’s no easy way to figure out how much you should be saving each month. But you should focus on building an emergency fund over other savings goals to start.
Saving should be one of the first line items on your monthly budget. This means it should come even before paying some other bills.
To get into the habit of saving, start by putting aside $20 or $30 per week. It may not seem like a lot compared to what you need to save, but it’s a start! Getting into the habit of saving is harder than hitting your savings goals.
As you get comfortable with saving, you can increase your savings amount.
Conservatively, you could aim to save about 5-10% of your monthly take-home-pay. If your take home pay is $3,000 per month, that’s about $150-300 per month.
Where Should I Keep the Money?
Your emergency fund should be easily accessible in cash or with a debit card. That means a separate checking or savings account works best.
You shouldn’t put your money into a retirement account or invest it in the stock market. These assets fluctuate in value and are harder to withdraw in times of need.
Everyone’s emergency fund looks different. Not everyone has the same monthly expenses or net income. Don’t feel embarrassed by how much you’re able to save or how long it will take you to reach your goals.
If you ever have to withdraw money from your emergency fund, you know exactly how much money you need to replenish it with. It should give you peace of mind knowing you have money to fall back on in an unexpected event.
Did we miss anything? What creative ways do you save for your emergency fund?