Life as we know it has changed drastically. Today’s environment has many of us thinking about emergency funds and whether it’s a good time to start one. It’s always a good idea to build an emergency fund and it’s never too late.
If you’re not sure how or where to get started, we can help. Our tips will guide you through the key steps to consider when building an emergency fund.
What is an Emergency Fund?
An emergency fund is like a financial safety net; it is money set aside in a designated account, separate from your everyday checking and savings accounts. An emergency fund is important to prepare you for life’s unexpected situations. The money in the account should be allocated for use in an emergency and help offset your finances if you experience loss of income, unexpected medical expenses, or need a major home repair. It can help cover costs and reduce the need to rely on your credit cards or take out high interest rate loans that could cost you more in the long run. This money should only be used in an emergency and not on everyday spending.
How Much Money Should I Have in an Emergency Fund?
The general rule of thumb is, 6 months of expenses should be saved in an emergency fund. The size of your emergency fund will vary based on your individual financial situation.
One way to determine how much you’ll need is to evaluate your current monthly expenses, including mortgage or rent, utilities, vehicle lease or finance charges and insurance all the way down to streaming services. Next, factor in your household’s financial structure. Are you single, living alone, and rely solely on your income? Does your household have two incomes, or is one head of household income supporting a spouse or partner and children?
Another way to determine how much money you need in your emergency fund is to consider the last time you experienced an unexpected situation, the amount of funds needed to resolve it and how quickly you were able to replenish the funds.
Either approach provides a baseline for determining how much you need in your emergency fund.
Where Should I Save the Money for My Emergency Fund?
Start saving for your emergency fund by opening a new, high-interest rate, savings account that keeps money liquid and insured so you can add small amounts each month and build upon the accrued interest. Start gradually, be consistent and resist the urge to spend. Remember, the purpose of building an emergency fund is to give you breathing room if you need it down the road.
How do I Start an Emergency Fund?
Saving for an unexpected event may seem overwhelming if your dollars are already being stretched. To get started, establish a budget, prioritize necessities, and reduce unnecessary spending. If you have a spouse or partner, keep each other on track by discussing purchases together to ensure they align with your saving goals. Start small, build upon your progress, and reward yourself at key milestones to stay motivated. Review the chart below to see how much you could save by putting just $25 or $100 into an emergency fund on a weekly basis.
Wondering where you can get these extra dollars from your monthly budget? Our tips, below, will help you find a few extra dollars in your monthly budget. The money saved each month can go directly towards starting and building your emergency fund.
Consider these tips:
- Start building an emergency fund with a portion of your tax refund or stimulus check if your situation allows.
- Look for free apps on your mobile device specifically created to help you save. These apps are designed to round up your credit or debit card purchases to the next full dollar and automatically add the change to a savings account of your choice.
- Plan meals ahead. Make a list of essentials before grocery shopping to reduce impulse purchases or doubling up on items you may already have at home. Start by making meals from food that is already in your pantry and freezer before replenishing any items.
- Cancel or lower subscriptions. Cutting back on magazines, unused fitness memberships and streaming or cable services will help you save each month.
- Adjust the thermostat in your home a few degrees, especially when you’re not there, to help save on your monthly utilities.
- Cut back on designer coffee and make it at home 3 times a week. This can save you up to $15 each week. That’s more than ½ way to a $25 weekly savings goal.
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Ready to Start an Emergency Fund?
An emergency fund is about being prepared for life’s unexpected events and is essential for peace of mind when navigating them. Remember, start small, build upon your progress, and reward yourself at key milestones to stay motivated.
Ready to start saving? Speak with a Jovia banking specialist and open an account today. You’ll be glad you did.