What is an emergency fund?
An emergency fund is an easily accessible savings account intended to help pay for unexpected expenses.
Recommendations vary, but most financial experts suggest an emergency fund with three to six months of living expenses. You might need an emergency fund include the following unexpected reasons:
- Job loss.
- Medical bills.
- Car repairs.
- Home repairs.
You should keep your emergency fund in a safe account with minimal risk, such as a checking or savings account. As your emergency fund grows, you can explore other investment options that bear minimal risk, with a slightly higher return, such as:
- Money market accounts.
- Treasury bonds.
- CDs (certificate of deposit).
If you don’t have an emergency fund, the time it takes to accumulate three to six months of expenses often feels daunting. Start by contributing a set amount each paycheck and treat the contribution like a bill that you cannot skip.
As you receive financial windfalls, stash them in your savings account. Any raises or bonuses that you receive should go straight to your emergency fund to help it grow as quickly as possible.
Emergency fund example
If you don’t have an emergency fund, now is the time to start saving. Open up a savings account so that you have a designated spot to keep your money. Now, determine how much you can contribute to the fund by weighing your monthly expenses and what left of your income.
Assume that your monthly expenses are $2,000 per month and your pay is $2,500. If you can save part of that, by establishing a $300 automatic deposit per month into a saving account, you won’t have to consciously transfer money into the account. You also get bonus at work of $2,000, and drop that into the account.
Assuming you don’t need to tap the account, you’ll have $5,600 saved within a year. You almost have saved three months’ worth of expenses.