The Importance of an Emergency Fund and How to Build One
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The Importance of an Emergency Fund and How to Build One
Unexpected expenses can throw off your entire financial plan – unless you have an emergency fund.
Without savings to fall back on, a car repair, medical bill, or job loss can lead to debt or financial stress. So here’s why an emergency fund is essential, as well as how to build one that keeps you covered. But first…
What Is an Emergency Fund?
An emergency fund is a stash of money that you set aside for unexpected expenses like medical emergencies, car repairs, home fixes, or job loss. Some people downplay the importance of having one. But without it, you might have to rely on credit cards or costly payday loans when you’re in a tight spot, which can make a bad situation worse.
For this reason, having an emergency savings gives you a measure of financial security and peace of mind.
How Much Should Be in an Emergency Fund?
Ideally, your emergency fund should cover 3 to 6 months of living expenses, which is typically enough to handle a job loss or major crisis. If you’re just starting, aim for at least $1,000 to cover smaller emergencies while you build a bigger cushion.
What Isn’t an Emergency Fund?
An emergency fund is not a vacation fund, down payment fund, or holiday savings. And in a perfect world, those funds should be separate. An emergency fund is strictly for unexpected, necessary expenses – not planned purchases or wants. For these, it’s better to set up different sinking funds accounts.
The bottom line: If you can plan for it in advance, it’s not an emergency.
Once you dip into your fund, make replenishing it a priority.
How to Build an Emergency Fund
1. Pay Yourself First
Treat your emergency fund like a bill, so set money aside before spending on anything else (including essential bills). Even if you can’t do a lot, small amounts add up over time. Open a savings account, preferably a high-yield savings, and start making regular contributions. (Related: Open a high-yield savings with CIT Bank)
2. Review Your Budget
You can’t start saving until you know what you’re working with. Because how can you set money aside if you don’t even know what’s coming in and going out? Therefore, look at your expenses and find a realistic amount to save each month. Even if it’s $20 or $50, consistency is key. (Related: How to Create a Budget That Actually Works)
3. Automate Your Savings
Set up an automatic transfer to your emergency fund so you don’t have to think about it. Out of sight, out of mind. And if you need help, you can look into platforms that save for you. For example, if you sign up for Acorns and link a credit or debit card, it’ll round up your purchases to the nearest dollar and then save/invest your spare change.
It’s a great way to save and become more comfortable with investing. Click here to get started.
4. Use Any Windfalls
Whether it’s a tax refund, work bonus, cash gift, put at least part of these into your emergency fund instead of spending them.
5. Save Extra Paychecks
If you’re paid weekly or biweekly, some months have five weeks and you’ll get an extra paycheck. Use it to boost your savings. (Related: Here’s How to Use an Extra Paycheck This Month)
6. Sell Unused Items
Declutter and make money at the same time. Sell things you no longer use and add the cash to your emergency fund.
7. Redirect Debt Payments
Once you pay off a debt, keep the momentum going by putting that freed-up money into savings.
Emergency Fund FAQ
1. What is an emergency fund?
An emergency fund is money set aside for unexpected expenses like medical bills, car repairs, or job loss. It keeps you from relying on credit cards or expensive payday loans when life happens.
2. What’s the danger of not having an emergency fund?
Without one, a financial emergency can push you into debt, forcing you to rely on high-interest credit cards or loans. This makes it harder to recover and can create a cycle of financial stress.
3. How do you build an emergency fund?
Start small, save consistently, and use extra money like tax refunds or side income to speed things up. Automating savings and treating it like a non-negotiable expense makes it easier to grow.
Comment below if you have additional questions on the importance of an emergency fund and how to build one!