How much should I save for an emergency fund?
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Life can change in the blink of an eye, which is why it’s important to prepare for emergencies that can upend your financial stability. Whether it’s an accident or illness, an unanticipated home repair, or the sudden loss of your job, having an emergency fund ready to go can help you avoid a devastating blow to your cash flow.
Emergencies can’t always be avoided, so here’s how to ensure you’re saving enough for unexpected tough times, as well as how to grow your balance over time.
What is an emergency fund?
An emergency fund is a large, easily-accessible sum of money set aside for when the worst happens. This money is generally kept separate from your regular checking account, as you don’t want to be tempted to spend it before you really need it.
Emergency funds are typically used in some of the following situations:
Losing your job or being furloughed
A car accident or costly car repairs
Home repairs like broken appliances
Last-minute travel for family emergencies
A sudden need for childcare
Why is an emergency fund important?
An emergency fund allows you to take action immediately when something bad happens, without the worry that you’ll damage your savings or credit. This money helps shield you from credit card debt or high interest from short-term loans.
How much should I save for an emergency fund?
The old proverb “better something than nothing at all” holds true here. You’re not alone if you’re starting from scratch—the majority of Americans would struggle to pay an unexpected expense as little as $500.
If you’re just getting started, $500 is a good first goal. Want to reach your savings goals faster? A Varo Savings Account offers a high annual percentage yield (APY), no fees, and easy auto-saving tools to help you grow your money.
If you’re already in the habit of saving, aim for enough to cover at least 3 to 6 months’ worth of expenses. Remember, your expenses are how much you’d need to pay your bills each month, not an exact match of your paycheck.
Workers in more less stable industries or roles (like freelancers) will benefit from a bigger emergency fund to help them float through slow months or economic downturns. Freelancers and seasonal workers should also pad their savings as much as possible during their busier months.
How can I save for an emergency fund?
1. Make it automatic
One of the best ways to save is when you don’t have to think about it at all. Many employers will even allow you to directly deposit a portion of your paycheck into a savings account like your emergency fund.
2. Cut where you can
Take a long, hard look at your monthly expenses. Could you cut one fancy dinner out per month or curb your impulse shopping online? Aim to be realistic with your spending habits and make cuts where you can.
3. Set smaller goals first
If you’ve calculated 6 months worth of expenses, you may be wondering how in the world you’re supposed to save that much money. Take a deep breath and start small—even if you only save $500 total at first, you’ll still be better prepared for an emergency than you were before. Set achievable monthly goals to help you stick to your savings roadmap.
4. Use your windfalls when you can
Holiday bonuses and tax returns can be a boon for your savings. To reach your monthly goals faster, make a habit of socking away any extra money you don’t need for regular expenses into your emergency fund.
5. Use a high-yield account
Not all savings accounts are created equal. Putting your emergency fund into a high-yield Varo Savings Account can help you save more money without even trying. It offers a 3.00% APY that is much higher than the average at the 5 largest national banks.
Hopefully, you’ll never have to dip into your emergency fund. But, having the peace of mind that you’re covered in a worst-case scenario can help you feel better prepared to take on big life changes like moving, getting a new job, or starting a family. No matter how small you start, building your emergency fund is a vital step toward long term financial stability.
Unless otherwise noted above, opinions, advice, services, or other information or content expressed or contributed by customers or non-Varo contributors do not necessarily state or reflect those of Varo Bank, N.A. Member FDIC (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s) other than Varo.
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