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Emergency Funds: What is the Right Amount and Where Should You Keep It?

February 24, 2020

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Life comes with many unexpected events. You can go from having a great week to a broken-down car or a medical emergency in two seconds flat. Unfortunately, these surprises aren't the ones we hope to find if our financial situations aren'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 ensure you never have to stress about things that are often out of your control.

You need an emergency fund no matter what age or stage of life you're in. If you live on one income, if you are self-employed, or if you're saving for a separate financial goal, an emergency fund can protect your economic well-being. 

Not only that, but emergency funds are helpful if you're paying off debt because they avoid you having to dip into your repayment money. 

How can you get started with saving an emergency fund?

Emergency funds are always a great decision, no matter what your financial situation is. However, they are even more helpful if you carry debt. 

"An emergency fund is meant to provide relief in a real emergency situation and prevent you from having to finance it on a credit card," says Erin Lowry, author of Broke Millennial. 

An excellent place to start is small. Even if you can only afford to put aside $10 to $20 per month, the fund will slowly begin to build. Not only will the account eventually start to grow, but you will also be building necessary financial habits that can lay an excellent foundation for future goals. 

Set up an automatic transfer from your checking account into a high-interest savings account that is purely there for emergencies. Your emergency fund should be easily accessible and available to you upon notice. Still, it should also be separated from other spending accounts so that you can protect your money from daily spending habits.

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 achieving this important financial goal.

What is an acceptable emergency fund amount?

Most experts recommend that you save three to six months of your income for emergencies. This way, if there is any job loss, you'll be able to keep yourself and your family afloat until you find a replacement income. The purpose of this account is to curb any stressful feelings that can often coincide with unexpected expenses. 

Although three to six months of expenses is an awesome idea — it's not always realistic for everyone. Instead, one way to determine how much you should keep in your emergency fund is to do the math on what your bare essential living expenses are. Lowry says that the bare minimum should include food on the table, utilities paid, rent or mortgage covered, transportation and debt payments. 

"Even if you're in debt, you need at least one month's worth of bare essential living expenses in your emergency savings," says Lowry. 

How can you decide what is considered an emergency?

Lowry says the key is not to misconstrue emergencies for something they're not. "It's not for when Beyonce has a pop-up concert, or you see a flash sale on flights for a vacation that you still can't afford."

Instead, she recommends you think more like you lost your job or you need to replace a tire on your car. If you want to hold yourself accountable and follow through on using this money for its real purpose, don't be afraid to write out 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 in 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 — and it's an even better feeling knowing you can handle these moments all by yourself. 

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