Are you among the 41% of Americans who are prepared to cover a $1,000 emergency with savings? If not, you definitely need an emergency fund. Having a savings account specifically for the unexpected (as opposed to retirement and other types of savings) can make all the difference between handling a sudden medical bill or other large expense with cash on hand vs. going into debt or borrowing money from a friend or family member.
In this article we'll answer your questions about emergency funds, such as:
- How much money do I need to save?
- Where should I keep my emergency savings?
- .... and more!
Are you ready to make a personal financial plan that will put you on the path to greater financial peace of mind? Let's get started!
How much should I save for emergencies?
If you're starting from zero, try a $1,000 starter goal. It may be easier to stay motivated if your target feels manageable and within reach. And $1,000 is still a nice chunk of change that could help you weather an expensive car repair, emergency room copay, and more.
Once you reach your initial goal, keep going! Many personal finance experts recommend keeping six months' worth of living expenses in an emergency fund. This gives you a nice cushion in case you lose your job or need to take an unpaid leave for other reasons. Certainly, the current Coronavirus pandemic has taught all of us the importance of preparing for months with a reduced income or no income.
Ultimately, you know your situation the best. If you work in a field with more job security, such as education or healthcare, you may not need six months of income. On the other hand, someone who is self-employed and supporting a family may want to have a whole year's worth of income saved.
Action Step: Set an initial and an ultimate goal that works for your life and budget.
How can I save for an emergency while budgeting for expenses?
Of course, if saving money were easy, the U.S. would have a higher personal savings rate. So don't beat yourself up about how much (or little) you're able to set aside each month. Just find a weekly, bi-weekly, or monthly amount that fits your budget and set up auto transfers from your checking account to your savings. Automating it makes the habit easy to stick with and chances are you won't even miss the money, especially if it comes out on payday. As the classic adage goes, pay yourself first!
What if I really have nothing extra to set aside for an emergency?
When there's not enough coming in, look for ways to generate extra income. Consider your natural talents and interests and try to turn them into a side hustle. For example, if you love kids you could take on weekend babysitting gigs. Crafty? Choose something to make and sell on Etsy. Have digital skills such as graphic design or copywriting? Advertise your availability on a site for freelancers. Then take whatever you make from your side gig and put it into emergency savings.
Another approach is to cut out a regular expense, such as a coffee run, and put the money you would've spent into your savings account. Keep a change jar at home to fill up and take it to the bank to deposit into savings.
Action Step: Figure out where your savings account deposits are going to come from and how much you can commit to.
Where should I keep my emergency fund?
The best place for your emergency fund is an FDIC-insured deposit account that will earn interest on your balance. This gives you immediate access to your money when you need it, and eliminates the risk of your savings declining in value. It also separates your emergency fund from the money in your checking account used for daily and monthly expenses.
Action step: Learn more about Vision Bank's savings and money market accounts.
What constitutes an emergency?
It may help you to make a list of what you can use your emergency fund for. This will hold you accountable to not tapping it for things like vacation or other discretionary spending. Here are some ideas for your list:
- Job loss
- Unexpected medical expenses to maintain your health
- Sudden car breakdown or accident
- Problems with a major system in your house (if you're a homeowner) such as an air conditioner, roof or electrical system.
- A family member passes away and you need to purchase last minute travel to the funeral.
- A family member gets hurt and you need to take time off work to provide necessary care.
Action step: Make your own list of approved emergencies and keep it somewhere, digitally or physically, where you can usually pull it out if you need to check.