Emergency Funds: What's the Big Deal?
2 min read
There's a good reason personal finance experts recommend that every household build an emergency savings fund. If you're hit with an unexpected home or car repair, lose your job, or are surprised by an off-budget expense, you'll have a ready source of cash to pay for it. While that's reason enough to grow your savings, preparing for a rainy day might still be at the bottom of your financial to-do list.
If you're struggling to find the motivation to build your emergency savings or can relate to the 51% of Americans who have less than three months' worth of expenses tucked away, review these additional benefits that might inspire you to prepare now — before a financial storm hits your household.
What Is an Emergency Savings Fund?
An emergency fund is money kept in a designated account to pay for financial emergencies. A good rule of thumb for most people is to fund the account with at least three months of living expenses. If you're self-employed, have an irregular income, or work a commission-based job, consider increasing the amount to at least nine months of living expenses.
Account withdrawals should be limited and only cover one-time expenses, like an emergency veterinary procedure or a new water heater. Funds can also be used for your monthly bills and keep you afloat if you lose your job.
3 Reasons Why You Need an Emergency Savings Fund
There are many reasons to pad your savings with an emergency fund. Here are three that are worth considering.
Emergency funds help you stay on track with other financial goals. If you're trying to improve your credit score, become debt free, or save for retirement, adding to your debt load by paying for unexpected expenses using high-interest rate credit cards could easily interfere with your ability to achieve those goals. When you have a fully-funded emergency fund, you can use it to pay for unplanned expenses.
Emergency funds can give you financial peace of mind. You don't need to be a six-figure earner or lottery winner to worry less about money. When you have money set aside to cover unexpected expenses, you gain confidence in your ability to control your finances. If an emergency occurs, these funds could bridge the gap while you wait for other financial support to arrive, i.e., unemployment benefits, long-term disability insurance payments, etc.
Other payment methods can be costly. It's tempting to use high-interest-rate credit cards or loans for emergency expenses when you're short on cash. Sometimes, you might not have a choice — but if you don't pay the balance in full by the first due date, interest charges are likely to be incurred and other fees may be added to the borrowed amount. With an emergency savings fund, you can avoid those additional expenses.
Build an Emergency Fund in 4 Simple Steps
An emergency savings fund serves as your interest-free insurance policy to protect your finances. Reaching your savings target is less of a challenge when you have a plan. Use these steps to build an emergency fund equal to three months of living expenses.
Step 1: Get clear on your savings target. Calculate your monthly expenses and multiply them by three.
Step 2: Decide how you'll fund the account. Will you focus on working more hours for your employer, earning money with a side hustle, or trimming your budget?
Step 3: Figure a savings timeline. Based on how you expect to fund the account, calculate a realistic timeline. Divide your savings target (Step 1) by the amount you expect to generate each month from Step 2.
Step 4: Automate deposits. Set up automatic transfers to a SAFE Federal Credit Union savings account to help your deposits grow faster. Accounts pay dividends on your average daily balance.