Unforeseen expenses, injuries, or accidents can wreak havoc on your finances if you are not prepared. But how can you prepare for the unexpected? An emergency fund can bring much-needed stability when the unexpected happens and help protect your long-term financial plans from disruption.
Keep reading as we explore how to start an emergency fund, how much an emergency fund should be, and the best places to keep your emergency fund money.
What is an Emergency Fund?
An emergency fund is money set aside specifically for unexpected expenses like car repairs, home repairs, or medical bills. It’s separate from daily expenses and long-term savings, ensuring it’s available during financial emergencies.
Why is it Important?
When everything is going well, it may seem like saving for an emergency is unimportant. However, even a small unexpected cost can easily knock you off track financially, especially for those early in their financial journey.
An emergency fund is an important safety net because it protects the hard work you have already put into building financial stability for yourself and your family. By keeping money aside to cover unforeseen expenses, you can avoid having to rack up credit card debt or having to take out high-interest personal or payday loans to cover the shortfall.
6 Steps to Building an Emergency Fund
Ready to build a more secure financial future by preparing for the unexpected? Here are the key steps involved in starting an emergency fund:
1. Start Now
It’s important to start an emergency fund as soon as you can. That can be tough if funds are limited or you are working to pay off college loans, credit cards, or other debt, but it is never too early to make a start.
2. Decide How Much Money You Want to Set Aside
Determine how much to save for your emergency fund, considering both short-term and long-term goals. Aim to save as much as possible while balancing other financial priorities. This decision will be explored further below.
3. Set a Monthly Savings Target
Once you have decided how much you want in your emergency fund, set a monthly savings target to build towards this amount. Where possible you should set up automatic transfers from your checking account to ensure you save consistently.
4. Decide Where to Keep Your Emergency Funds
Choose a place for your emergency funds that offers quick access. Avoid long-term investments like share certificates or stocks, as they’re less liquid. A separate account is ideal to avoid the temptation of using the funds for everyday expenses.
5. Prioritize Building Your Fund
Your emergency fund is a critical safeguard for financial security. Consider reducing discretionary spending to contribute more until you reach your goal. You can also allocate windfalls, such as work bonuses or tax refunds, directly to your fund.
6. Replenish & Review
If you do need to use your funds then it is important to replenish them afterwards. Starting over can be tough, but it’s essential to continue protecting your financial interests. Periodically take the time to review how much you should keep in your emergency fund and readjust it to match your financial situation and your family’s changing needs.
How Much Should An Emergency Fund Be?
The more you can save the better, but you do need to balance your contributions with your monthly expenses and, eventually, your longer-term savings goals.
While you should try to have $500 in your emergency fund as soon as possible, many financial experts recommend shooting for the equivalent of between three and six months’ worth of expenses. This is a realistic amount to have saved in the event of a major medical emergency or an unexpected job loss.
So, how much exactly should you save? It depends on your financial situation and the security of your income. For example:
- If you have an established full-time job with benefits at a company that is doing well, you might feel comfortable saving the equivalent of three months’ income.
- If you are a freelancer, consultant, or otherwise self-employed, it might be wise to save more because your income stream is not as stable.
You might also want to save less if you have outstanding high-interest debt. In this case, using your extra cash to pay down credit cards or personal loans is just as effective as putting money aside, because these payments will still have to be paid in the event of an emergency.
Where Should You Keep Your Emergency Fund?
Keep your emergency fund in an account that’s easily accessible for unforeseen events but separate from daily spending to avoid unnecessary withdrawals.
Below are some popular options for storing emergency funds.
Regular Savings Accounts
A savings account offers a separate place to store funds that can be linked to your checking account for automatic transfers. It can also be reached instantly in the event of an emergency.
Pros of a savings account:
- Money is instantly available
- Earn dividends on your savings
- Low opening and minimum balance requirements
- Set up automatic transfers to ensure consistent saving
Cons of a savings account:
- Transactions limits on how often you can withdraw funds
- Even high-yield dividends are typically lower than other savings options
High-Yield Savings Accounts
High-yield savings accounts offer you all of the advantages of a savings account plus a higher annual percentage yield (APY), generally with a higher minimum deposit and a limit on how much you can deposit.
Pros of high-yield savings accounts:
- Higher APYs than regular savings accounts
- Money is instantly available
- Set up automatic transfers to ensure consistent savings
Cons of high-yield savings accounts:
- Higher minimum balance to earn dividends
- Deposit limits
Money Market Accounts
Money market accounts offer all the accessibility of a regular savings account but with higher dividend yields.
Pros of a money market account:
- Money is instantly available
- Higher dividends than regular savings accounts
- No deposit limits
- Set up automatic transfers to ensure consistent saving
Cons of a money market account:
- Transactions limits on how often you can withdraw funds
- Significantly higher opening and minimum balances than savings accounts
Share Certificates
Share certificates can be a good way to build savings further but you must have established a significant savings nest egg of six months’ equivalent expenses.
A share certificate allows you to invest an amount as small as $1,000 for periods as short as six months. During this time your money is unavailable to you without paying a penalty, but earns a significantly higher yield than savings and money market accounts. And, savings are guaranteed in the same way as regular deposit accounts.
Obviously, you will want to keep a significant portion of your savings more readily available in the event of an emergency, but shorter-term share certificates can be a good way to earn more from your savings.
Pros of share certificates:
- Higher yields than most regular savings and money market accounts
- Terms as short as six months
- Guaranteed returns on your investment
Cons of share certificates:
- Higher investment amounts required
- Money is unavailable until the share certificate matures
All of these options represent viable risk-free ways to get more out of your emergency savings. However, high-yield savings accounts do offer a great mix of affordability, accessibility and growth potential, making them the best option for many savers.
Smarter Savings for Whatever Life Has in Store
At Soarion Credit Union, we know how hard it is to get started on your financial journey, and how easy it is for unexpected expenses to set you back.
That’s why we offer our members a range of savings products, including our affordable Primary and Secondary savings accounts, money market accounts, and short-term Share Certificates, to help you set aside money for the unexpected.
Our generous High-Yield Savings Accounts provide exceptional value for savers who are serious about planning for the future, offering an APY* of 3.00% on amounts up to $25,000.
Ready to start saving to secure your future? Click below!
* APY = Annual Percentage Yield. Dividends Compounded: Monthly. Dividends Credited: Monthly. Balance Computation Method: Dividends are calculated using the daily balance method. This method applies a daily periodic rate to the principal in the account each day. Rates subject to change at any time without notice. Fees may reduce the earnings on the account. Membership Required.
