Emergency Fund: What it Is and Best Practices
Over 46% of millennials have $0 saved. 😵Having an emergency fund is one of the most easiest ways to reduce your financial anxiety. An emergency fund is a must have for any unexpected expenses that come up - because after all, life happens and you just can’t anticipate everything.
What is an Emergency Fund and Why Do I Need One?
An emergency fund is money you have set aside (in a bank account) to cover any unexpected expenses that come up. This can include anything from short-term unemployment or emergency situations such as ER visit or your car breaking down.
You should set this fund up before any other types of savings (e.g., retirement, college, downpayment of a home). It can protect you if you lose your income and prevent you from taking on high-interest debt such as loans or credit cards, losing your housing, or going into bankruptcy. Especially if you have debt, the best way to get out of it is to prevent yourself from going further into debt.
How Much Money You Should Have in Your Emergency Fund?
We usually recommend up to 6 months in living expenses. For example, if you lose your job you have the time to fund your expenses and also find a new one. Of course, 6 months can be daunting and the important thing is taking the first step – we recommend that even saving $500 as a first step can benefit you.
Where Should You Keep Your Emergency Fund?
You need to put your emergency fund in an account you can easily access for emergencies. A high-yield savings account is a good idea – it can help you earn interest, it’s federally insured up to $250,000, and you can access your money when you need it. It’s a good idea to have a separate account for your emergency fund and any savings above that, so you won’t touch this money unless necessary.
Here is a list of high-interest savings accounts: https://www.withsnowball.com/blog/the-highest-apr-savings-accounts-2018
When Can I Use an Emergency Fund?
Remember that an emergency fund is for exactly that – for emergencies. An emergency is usually something that affects your health or ability to earn money.
What are some good examples?
- You have to go to the emergency room and your insurance doesn’t cover it
- Your car breaks down and needs a new part
- You need to evacuate for a natural disaster and need to buy supplies or pay for a hotel room
- You lose your job and need to pay rent
What wouldn’t you use your emergency fund for?
- Expenses that are routine in your life such as car insurance, student debt payments,
- Birthdays that come up for or a large purchase that is a “want” such as a new
- Lending money or buying a gift for a friend who needs it
How Do I Start Contributing to an Emergency Fund?
Putting in any amount of money (even starting with $5) is the first crucial step in starting an emergency fund. After that, there are ways to find money in your life.
- Create a monthly savings goal - automatically transfer funds to your savings account each month. This can be as low as $20, but will get you in the habit of saving.
- *Take a look at your budget* - you can find extra money by seeing where you can trim expenses (see creating a simple budget https://www.withsnowball.com/blog/creating-a-simple-budget-with-the-50-30-20-rule).
- Get extra income - if you think this is doable, see where else you can get some extra money. This can include a second job (see side hustles https://www.withsnowball.com/blog/which-side-hustles-earn-the-most) or selling items like clothes.
- Save any large cash payments - if you get a tax refund or work bonus, automatically put aside a certain % towards your savings.