7 Ways to Cover Your Assets and Your A: How to Start an Emergency Fund
We need to face an adulting truth: emergencies happen. Emergency funds on the ready could help relieve some stress during financial chaos. According to Pew Research, if faced with an unforeseeable disaster like job loss or illness, only 47% of U.S. adults have the money to cover bills for three months.1 No one wants to get caught under a pile of bills, so preparing in advance is worth the trouble. Read on for workable steps to start your emergency fund and maneuver your way through life’s unescapable bumps.
An emergency fund is a separate account kept as a future safety net for unexpected expenses. This dedicated savings is set up so you don’t have to rely on credit cards or a loan to be able to take care of business, and so you don’t get caught in a debt storm. The Consumer Financial Protection Bureau reports even minor monetary emergencies could set a person back from financial security, and if the situation snowballs into debt it could have lasting results.2
The following examples give you an idea of what kind of emergency warrants withdrawals from your emergency fund. Set rules for yourself about what constitutes an emergency so you’re not unnecessarily dipping into the account. It isn’t for money grazing.
These helpful examples give an idea on when to use your emergency reserves.
These examples showcase when you should not borrow from your emergency funds.
Just like retirement and personal savings accounts, an emergency fund is important because it creates some monetary security. A Bankrate survey shows only 40% of U.S. adults would be able to cover a $1,000 unexpected cost like an ER visit or repair bill. And 28% said in the last twelve months, they or a close family member had a crucial unforeseen expense. 3 Yikes! If you have kids, that could be a fall from a bike and a broken arm or even a fender bender! But there’s no need to put extra pressure on yourself. Remember, we’re building here. This account doesn’t have to accumulate all at once.
Most financial experts suggest saving between three to six months of living expenses in your emergency fund. It would be optimal for you to have enough money to smoothly manage your household bills (like rent, food, utilities, health care, etc.) for at least three months.4 Keep in mind, this is a journey and you can add to your emergency fund weekly, monthly or whatever schedule that works best for you.
Yep, I said the B word. If you need help building your budget, don’t be afraid of doing a little research. You could even utilize Bankrate’s Home Budget Calculator for budgeting help. Once you know your expenses and how your money is coming and going, you can figure out how much to send into your separate emergency account.
After you’ve figured out how much and when you want to start saving you need to keep the money in a safe place. It’s best to have the funds accessible so you can use them quickly if you have an unexpected disaster. FDIC insured money markets or high-yielding savings accounts are good options for an emergency savings account.5 Look for the following features in an account:
To ensure that your funds stay strictly for emergencies, keep them in an account that you won’t be tempted to access.
A good rule of thumb is to put money into savings when you get paid. But if this timeline doesn’t work for you, try a different date or put aside a certain percentage of your pay each month.
You know when you determined how much you needed all the way up at number one? That’s your goal.
If that unexpected catastrophe does happen and you use your emergency funds, follow the guidelines starting at “Step 1” to begin saving again and replenish your account.
Starting an emergency fund can feel intimidating and overwhelming, but large unexpected costs with no resources could be worse. You can start your reserve slowly with a good plan of action. Figure out a reasonable amount as your goal, find where you can save, deposit funds in an accessible, interest yielding account, and make those deposits a habit. Once you set this financial goal and stick with it, your savings will grow and you’ll be one step closer to financial security!
1 Parker, K., Horowitz, J. M., Brown, A. (2020, April 21). About Half of Lower-Income Americans Report Household Job or Wage Loss Due to COVID-19. Retrieved from Pew Research Center: https://www.pewsocialtrends.org/2020/04/21/about-half-of-lower-income-americans-report-household-job-or-wage-loss-due-to-covid-19/
2 Staff. (n.d.). An essential guide to building an emergency fund. Retrieved from Consumer Financial Protection Bureau: https://www.consumerfinance.gov/start-small-save-up/start-saving/an-essential-guide-to-building-an-emergency-fund/
3 Dixon, A. (2020, January 22). Survey: Nearly 4 in 10 Americans would borrow money to cover a $1K emergency. Retrieved from Bankrate: https://www.bankrate.com/banking/savings/financial-security-january-2020/
4 Staff. (n.d). What’s the Right Emergency Fund Amount? Retrieved from Vanguard: https://investor.vanguard.com/emergency-fund/amount
5 Shell, A. (2020, April 10). Here are three accounts you need to manage your money and give yourself financial security. Retrieved from USA Today: https://www.usatoday.com/story/money/personalfinance/2020/04/10/savings-accounts-checking-retirement-3-essential-places-for-money/5115654002/