What Is An Emergency Fund?
First, just what is an emergency fund and why do you need one.
Just like the name implies, an emergency fund is money set aside for emergencies. You need one because life is unpredictable and while you might have long term savings or investments, you need money that you can access quickly. But how much money?
A well funded emergency fund should have enough money in it to cover at least 6 months of expenses. So, if you need 3000 dollars a month to cover your expenses, you should have at least 18000 dollars in your emergency fund. Now, that certainly is a lot of money, but keep reading and learn some tips to get you there.
Tips For Starting & Funding Your Account
An emergency fund can take some time to build, but the sooner you get to work on it the better. As we all know from the last few years, nothing in life is certain. Here are the tips.
Open A Separate Account
You should not host your emergency savings account at the same bank where you already do business. The reason for this is the fact that your money would be too easy to access. You want funds that are available quickly but not instantly.
The ideal bank to use is an online savings account such as Marcus. The money would still be available within a business day, but you would not be able to use it to impulse buy. In addition, online accounts usually offer higher interest rates. It still might only be a few percent, but this is much better than what your local bank offers.
Get A Budget
If you do not already have a budget, now is the time to get one. Don’t worry, it does not have to be that complicated, simply list out all of your expenses.
First, start with an amount to save, preferably at least 10 percent of your take home pay. So if you take home 4000 dollars a month, you should be saving at least 400 dollars of it. Once you have an amount to save, enter in all of your other expenses and balance your budget to make your expenses match your take home pay. Try to account for every dollar of your pay.
Automate Your Contributions
Once you have a budget and a saving target, it is time to automate everything. Set up your savings deposits to be transferred from your checking account to your online savings on the day that you get paid. You need the money to be transferred just as soon as possible. As the saying goes, out of sight, out of mind.
Windfalls are sums of money that you did not expect to get. It could be a tax refund, a bonus at work or even a winning lottery ticket. The temptation when you get this kind of money is to waste it, but it could be put to better use in your emergency savings.
If you absolutely must treat yourself, try to at least put the majority of your windfall into savings. If you came into 1000 dollars, spend 100 dollars on something nice and put the rest in your account.
Once you build that emergency savings to where it needs to be, you need to monitor it. Start directing new savings into an investment account, but always make sure that you have at least 6 months worth of expenses in it. The amount of money that you need today is likely less than you will need in 5 years, so be prepared to ass some additional funds as needed.