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Once in a while, life throws a curveball, which can spell trouble for your finances.
For example, you might lose your job, end up in the hospital, or your car could break down. Having money set aside to handle these mishaps prevents you from having to swipe your credit card and go into debt.
In this article, we’ll discuss why creating an emergency fund should be a top priority. Having an emergency fund gives you peace of mind as you’ll be prepared when something goes wrong.
What is an Emergency Fund?
An emergency fund is a place you store money that can be readily accessed in case you incur an unexpected expense. Emergency funds are typically placed in a bank account, such as a high-yield online savings account, where money can be easily moved in and out.
It’s wise to keep your emergency fund separate from the rest of your money, meaning a separate bank account makes sense.
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How much you keep in your emergency depends on how much your monthly expenses are, though many experts agree that six months’ worth of living expenses is wise.
Why Should Creating an Emergency Fund be a Top Priority?
Having an emergency fund is key because emergencies happen, and it makes sense to be prepared. If you or your family members get sick, or a car breaks down, or you lose your job, you may be forced to sink into debt if not for having an emergency fund.
Considering you may already have debt, not having an emergency fund when an emergency happens means you’ll sink further into debt, making it even more difficult to get out.
Aside from the financial issues, this can cause emotional distress as you may feel like your situation is getting worse and that climbing out of it is more challenging than before.
Another reason to prioritize creating an emergency fund is having cash on hand. There are situations where you’ll need cash, and being able to withdraw money from your emergency fund instead of taking out a cash advance from your credit card is smart.
Cash advances from credit cards come with fees and higher interest rates, which can often make your financial situation worse, not better.
Having an emergency fund teaches you to save money regularly. You can automate your savings by setting up automatic withdrawals from your checking account to your emergency fund with each paycheck or once per month.
Even saving $100 per month or $25 per week can go a long way for someone who struggles to save anything.
How Much Emergency Fund Should I Have?
Most financial experts agree that having three to six months’ worth of living expenses is a wise amount to have in your emergency fund. That said, some feel that since the COVID-19 pandemic, having up to a full year of living expenses saved up may be even safer.
It can feel overwhelming to save up to six to twelve months of living expenses, so start small and focus on incremental saving. For example, first focus on saving $1,000. This can be done by cutting back on various expenses, temporarily working overtime, or doing a weekend side hustle.
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Get into good savings habits by putting aside a little bit each day or week. Another trick is that if you were about to impulse buy something, put that money into savings instead.
That promotes good savings habits while also helping you curb an impulse to spend money on something you might not actually need.
Where Are Good Places For an Emergency Fund?
Storing an emergency fund in a high-yield savings account makes a lot of sense as you’ll earn some interest on your money.
You’ll want to separate your emergency fund from the rest of your money, and some even opt to use a separate bank to make it a little more difficult to access the money when they don’t truly need it.
When choosing a bank, look for one with a high interest rate, but don’t get too caught up in picking the highest rate as interest rates change frequently. Instead, focus on a bank that you feel will be reliable and has ways to access it that are easy for you (an app, near your home, etc.).
How Do I Build an Emergency Fund?
To build an emergency fund successfully, first set one or more savings goals, such as saving $1,000 first and then saving three months of living expenses before saving six months of living expenses.
Then, create a budget so that you can track your spending. Identify areas where you’re spending too much money and cut back.
This could be cutting back on going out to eat too much, spending money on subscriptions that you aren’t using, or excessive online shopping.
You can also create more income by working overtime at work, asking for a raise, getting a promotion, or picking up a side hustle.
Whichever method you choose, be sure to pick something that’s easy for you to stick to, as it’s going to take time to save money for your emergency fund.
Wrapping It Up
It’s important to prioritize saving for an emergency fund, as having an emergency fund is crucial when life inevitably throws a curveball at you.
Whether you choose to cut back or work harder, the key takeaway is that you do something that works best for you while you save your first $1,000 and then eventually fill your emergency fund with enough money that you are well protected.
Dave is a Certified Educator in Personal Finance (CEPF®) and is passionate about spreading financial literacy. He founded Clean Cut Finance in 2021 and has been featured on websites like Yahoo! Finance, MoneyGeeks, and GoBankingRates. In his spare time, Dave enjoys experimenting in the kitchen, racing simulation, and reading.