BUILDING YOUR EMERGENCY FUND: WHERE TO BEGIN
First, what is an emergency fund?
An emergency fund is money that is specifically set aside for unexpected surprises and financial emergencies in your life. This chunk of money should be held in a high-yield savings account that you can withdraw from in the event of an emergency.
Why are emergency funds necessary?
Life happens, and sometimes it can be very costly. An emergency fund provides a safety net that you can easily withdraw from, instead of borrowing money that can leave you drowning in debt. Being financially prepared for emergencies also decreases your stress when the event actually occurs.
Emergencies include:
Losing your job
An unexpected medical bill
Car repairs
A broken appliance
How much money do I need in my emergency fund?
The amount of money needed in an emergency fund is unique to each individual and each situation. A family of 4 is not going to have the same emergency fund as a 22-year-old right out of college.
It is recommended to have between 3–6 months of living expenses saved. Take the time to think through a realistic amount you may need if an emergency were to come up and make that your goal to save in your emergency fund.
How to start your emergency fund:
Open a high-yield savings account
The first step to building your emergency fund is opening a high-yield savings account (HYSA). An HYSA is a savings account that offers a higher-than-average interest rate with still maintaining low risk. This is going to make your money work harder for you.
Don’t have an HYSA yet? Check out: Best High-Yield Savings Accounts for August 2023
2. Set your goal
Now, you need to come up with a goal amount you want to save in your emergency fund. If you need an initial idea, calculate what 3–6 months of living expenses looks like for you and have that be your goal. Having a set number in mind will help motivate you to build that fund.
3. Automate your contributions
The easiest way to build your emergency fund with little effort is to set up automatic transfers from your checking account, or better yet, a direct deposit from your employer. Even if it’s just $25 each pay period being transferred into your HYSA, having any automatic contributions set up is going to help you passively reach your goal.
4. Be disciplined and monitor your progress.
Now that you’re beginning to see this account grow, it can be tempting to dip into it for non-emergencies. Be strong! Continue to make monthly, weekly, or daily deposits until you reach your goal, and watch that money grow!
Once your emergency fund is fully funded, it’s time to move to the next part of your financial journey like paying off debt or other savings goals.
