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What’s the right amount for an emergency fund and where should you keep it?

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Life inevitably comes with many unexpected events. You can go from having a great week at work to a broken-down car or a medical emergency in 2 seconds flat. These surprises aren't the ones you hope to encounter, especially if your financial situation isn’t under control. 

Rather than play with fire, there are ways you can stay ahead of the unexpected with less financial stress, such as an emergency fund.

Why do you need an emergency fund?

An emergency fund is just that—a way to prepare for emergency expenses that appear out of thin air. Emergency funds exist to help keep your financial health in good standing and reduce  stress about things that are often out of your control.

No matter what stage of life you’re in, it’s smart to have an emergency fund to protect your economic well being. This is especially true if you live on one income, you’re self-employed, or you're saving for a separate financial goal.

Not to mention, emergency funds are important if you're trying to pay off debts or loans, as they can help you avoid having to dip into your repayment money or go further into debt to provide relief in an emergency situation. 

How can you get started with saving an emergency fund?

If you’re just getting the ball rolling with an emergency fund, it’s ok to start small. Even if you can only afford to put aside $10 to $20 per month, the fund will slowly start to grow, and you’ll also be building the necessary financial habits that can lay the groundwork for future goals.

Set up an automatic transfer from your checking account into a Varo Savings Account that is purely there for emergencies. Your emergency fund should be easily accessible and available to you upon notice. But, it should also be separated from other accounts you use regularly so you can protect your money from everyday expenses.

Don't fret if you have to use this account before it's fully funded. It's there for when you need it most, and that shouldn't deter you from sticking with your savings goal and replenishing it when you can.

What is an adequate emergency fund amount?

Most experts recommend that you save 3 to 6 months’ worth of your income for emergencies. This helps guarantee that if you unexpectedly lose your job or source of income, you'll be able to keep yourself and your family afloat until you find a new position. This account can also help curb the stress that often coincides with unexpected life changes or expenses. 

Although 3 to 6 months’ worth of expenses is a good goal, it's not always realistic for everyone. Another way to determine how much you need in your emergency fund is to determine the bare essentials in terms of living expenses. This includes things like food on the table, utilities paid, rent or mortgage covered, transportation, and debt payments. 

How can you decide what is considered an emergency?

Try not to misconstrue emergencies for something they’re not. Although you might think you need that annual vacation or new TV, this type of splurge is generally not something you should use your emergency fund for. If you want to hold yourself accountable and follow through on saving this money for its real purpose, try making a list of acceptable expenses that might fall under your emergency umbrella. 

Think of your emergency fund as a family member who can help you out when you're under financial constraint, but doesn't expect you to pay them back. It's always a good feeling to know you have support for the unexpected expenses that life can throw your way when you least expect them—and it's an even better feeling knowing you can handle these moments all by yourself. 

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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