You’re going about your life, paying your bills and buying the things you want and need. Then the pandemic hits, and you’re worried. Your savings don’t look as hefty as you once thought. You’re scared your company may let you go. And your hot water tank just broke and needs replaced immediately.
Sounds like a rough situation to be in. But if you had an emergency fund in place, you’d feel much more secure.
What’s an emergency fund, you ask?
It’s what it sounds like. According to NerdWallet.com, an emergency fund is a bank account with money set aside for emergencies. This includes large, unexpected expenses, such as unforeseen medical expenses, home-appliance repair or replacement, major car fixes and unemployment.
But why do you need one? Especially if you have steady income.
This fund creates a buffer that will keep your finances in the black instead of going into debt — or further into debt, if you already have debt — from putting unexpected expenses on a high-interest credit card.
Choosing how much you should have in an emergency fund is up to you, but here are some guidelines, if you’re unsure.
If you’re starting small, it’s good to save about $500 and work your way up to six months worth of expenses.
The right amount really depends on your financial circumstances. The popular thought is to have between three to six months of expenses saved.
This helps you have money to cover expenses while looking for a new job if you find yourself unemployed.
Now that you have a figure in mind that you’re working toward, where is the best place to put it? That would be a high-yield savings account.
Because you want the money to be easy accessible but separate from the money you use to pay bills, a high-yield savings account just makes sense. It’s also crucial that you don’t put your emergency fund into investments because those can dip based on the market and world events.
High-yield savings accounts are federally insured and accrue interest — the good kind. So your money will grow — even if only by a small percentage each month.
NerdWallet.com offers six tips to build an emergency fund.
1. Calculate the total you want to save.
Add up your monthly bills and multiply that figure by three or six, depending on how large you want your emergency fund.
2. Set a monthly savings goal.
This will help you build little by little and get you in the habit of saving regularly. An easy way to do this is to set up automatic transfers to your savings account.
3. Deposit money into your savings automatically.
If your employer offers direct deposit, you should be able to designate a certain amount from each paycheck to deposit into your high-yield savings account.
4. Keep the change.
There are plenty of apps out there that help you save with every purchase. They round up each purchase, and the extra amount is sent directly to your savings account.
5. Save your tax refund.
If you receive a tax refund, consider sending it to your emergency fund before spending it on something else. Alternatively, you could adjust your tax form so that you have less money withheld, and you could transfer that money each pay directly into your emergency fund.
6. Assess and adjust contributions.
After a few months of saving, check in to see where you’re at, and adjust if needed. If you recently withdrew money, make sure to pay it back. If you’ve gone over the amount you need, think about investing the surplus funds.
Once your emergency fund is in place, make sure you know what is considered an emergency and what’s not. You may want to start another fund once this one is fully funded. The additional savings fund can cover expenses such as vacations, car maintenance, gifts for others and clothing.