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What Is An Emergency Fund?
An emergency fund is money that you put aside to cover unexpected expenses. It is one of the best financial safety nets someone can have. However, you need to be careful where you keep your emergency fund savings.
You don’t want to act irrationally when those events arise. And you’ll need to access your emergency cash reserve as soon as an unexpected expense comes your way. That is why you need to have a plan.
According to the Federal Reserve, in 2018, 20% of Americans had to deal with an unexpected expense.
What Are Unexpected Expenses?
We can divide unexpected expenses into two categories – small or major unexpended expenses.
Small unexpected expenses cost less than $500. They can potentially happen regularly due to their nature. For example: car repairs, household repairs, or occasional gifts.
Major unexpected expenses cost more than $500. They can be difficult to go through without a plan. For example: job loss, medical emergency, home maintenance, or emergency travel.
Planned purchases are not considered unexpected expenses, even if they are expensive. For example: a new laptop, a new smartphone, or home furniture.
Why To Get An Emergency Fund?
39% of Americans won’t be able to pay an unexpected expense of $400. In case of an emergency, they would need to borrow money.
The goal of an emergency fund is for you to save money in case of rainy days. You won’t have to think twice when your emergency fund will be fully-funded. Thus, you won’t make bad financial decisions when facing an unexpected expense.
If people have to borrow money, they usually rely on credit cards or high-interest loans. Thus, they will have to pay interest on the loaned money. As a result, they will end up paying more than what the cost of the unexpected expense will be.
How Much For Your Emergency Fund Savings?
Experts advise people to save between 3 to 6 months of expenses in your emergency fund.
But, even a minimum of $1,000 in your cash of reserve can help you go through the small unexpected expenses.
The primary goal for you is to feel comfortable and safe in case you have to face an unexpected event. And keep in mind that something is better than nothing.
How To Build Your Emergency Fund?
How To Start Your Emergency Fund?
It might seem hard to think about building an emergency fund. For instance, you might think that given your current financial situation you don’t have a lot of room to save money.
Even if you don’t live a lavish life, they are things that make you happy and cutting them out of your life won’t help you in any way. For example, you might want to keep seeing your friends, enjoy good food, or a few drinks. Similarly, you might not want to stay home all the time just to save a few bucks.
We understand you! The great news is that you don’t have to cut everything you value in life to start building your emergency fund. And, remember that smaller goals are easier to achieve than bigger goals. So, go at your own speed and start to put aside only what you can afford.
What Is An Emergency Fund Savings Plan?
The first thing you should focus on is to write your emergency fund savings plan. It will allow you to set monthly savings goals, and help track your progress along the way.
Take a look at your emergency savings plan from time to time to check if you are making progress on your goals. In case you are not saving enough money, you might need to make a few adjustments to your daily expenses.
Most importantly, you need to stay motivated so find out which strategy will work best for you. For example, you could print your emergency saving plan and look at it daily.
How To Save More Money?
Now that your emergency saving plan is ready, it is time to think about how you are going to save money. So here are a few ideas to start with.
- Make a monthly budget to track better your expenses
- Look into your monthly expenses and cut some of the purchases that doesn’t affect your day to day life
- Save your tax returns or any other bonuses instead of spending it on extra purchases
- Invest your money and earn interests to grow your savings
Where To Invest Your Emergency Fund?
In general, keeping your emergency fund far away from the bank you use daily can be a great idea. That strategy will help you to stay away from using your cash reserve to pay for regular expenses.
By definition, your emergency fund needs to be quickly accessible. But, it doesn’t mean that you have to keep it in a checking account that won’t let you earn any interest.
Even for short-term investment, growing your cash reserve can be a great option. Few low-risk investment accounts are giving better interest rates than traditional bank accounts. For example: a high-yield savings account or a money market account.
In conclusion, you have read everything there is to know about emergency fund savings. Now, it is time for you to take action. But, make sure that the decision you make is in par with your current financial situation.