An emergency fund is a vital part of healthy finances. If there’s one constant in life, it’s that it is not constant. Life happens, as they say. Unexpected expenses appear out of thin air. You could suddenly find yourself unemployed. There is no way to see the future, which is why an emergency fund is so important. It provides a cushion should you stumble financially. Here’s everything you need to know about this fund.
How Much to Save
The basic rule of thumb for emergency funds is that you want to have enough saved to cover six months of expenses. If you’re just starting out, aim for enough to cover one of your bills, then go from there. The important thing is to save something each month, no matter how small.
Where to Stash It
As this is an emergency fund, you want easy access to the cash should you need it. That means your money should not be in an investment fund. Instead, look for high-yield savings accounts. You should look into credit unions as well as online banks, as those often offer higher interest rates than big banks.
How to Save
If your emergency fund is low or non-existent, patience is a virtue. Keep at it and one day you’ll reach your goal. Need help getting started? Try some of these strategies:
Focus on Each Month. Don’t get discouraged by the “six months of expenses” goal. Instead, focus on saving something small each and every month.
Set Auto Deposits. Make sure you are dividing your paychecks into your checking and your savings account. This way you won’t be tempted to spend the money that should’ve gone to your emergency fund.
Set Aside Chunks. If you get a sudden windfall of cash — like a tax refund or a bonus at work — put it into your fund.
Adjust Your Budget. Keep your budget as lean as possible while you build up your emergency fund. Once you hit your goal, you loosen things up a bit.