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When times get tough, you’ll be glad you set aside money in an emergency fund. Here’s a summary of how emergency funds differ from regular savings, how much you should plan to save, and tips to help 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 separate from your regular checking account because you don’t want to be tempted to spend it before you really need it.
An emergency fund helps when unexpected expenses come up, like in these situations:
- Medical emergencies
- Pet or child emergencies
- Losing your job or being furloughed
- Costly car repairs
- Home repairs (broken appliances)
- Last-minute travel for family emergencies
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 keeps you safe from credit card debt or climbing 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, too. You’re not alone if you’re starting from scratch — almost 40% of Americans would struggle to pay an unexpected expense as little as $400.
Starting off, $500 is a good first goal. If you’re already in the habit of saving, aim for enough to pay for three to six months’ worth of expenses. Remember, your expenses are how much money you’d need to pay your bills each month, not an exact match for your paycheck.
Workers in more unstable industries (like freelancers) will benefit from a bigger emergency fund to float them through slow months. Freelancers and seasonal workers should pad their savings as much as possible during their busier months.
How can I save an emergency fund?
- Make it automatic
The best way to save is when you don’t have to think about it at all. Many employers will allow you to set up a portion of your paycheck to direct deposit into a savings account like your emergency fund.
- Cut where you can
Take a long, hard look at your monthly expenses. Could you cut one happy hour with friends per month or curb your impulse shopping on Amazon? Be realistic with your habits but make cuts where you can.
- Set smaller goals first
If you’ve calculated six 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, you’ll still be better prepared for an emergency than you were before you started saving. Set achievable monthly goals and you’ll be well on your way.
- Use your windfalls when you can
Holiday bonuses and tax returns can make a nice dent in your savings goal. Make a habit of socking away any extra money you don’t need to pay for regular expenses into your emergency fund. This will help you reach your monthly goals faster and won’t feel like you have to cut back.
- Use a high-yield account
Not all savings accounts are created equal. Putting your emergency fund into a high-yield savings account can help you save more money without even trying. Regular savings accounts earn 0.05% on average per year, while high-yield savings accounts can net as much as 0.50% by comparison.
Even if you never have to dip into your emergency fund, knowing that you’re covered will help you feel better prepared to take on big changes like moving, a new job, or starting a family. No matter how small you start, building your emergency fund now will leave you in a better spot tomorrow.
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