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Life happens all the time, and it's hard to go about predicting when or how surprises will arrive. Despite this fact, only41% ofAmericanswould be able to cover a $1,000 emergency with savings.
It could be that your income is cut oryou lose your joband you cannot find a new job as quickly enough. As a result, you may find yourselfstruggling to pay your bills. Or it could be that your car gets a flat tire, your water heater breaks, or you need to buy an emergency plane ticket.
All of these are situations in which having anemergency fundcan make all the difference. And given the unpredictability of life, it's vital to prioritize youremergency savings. Here are all the details about what you need an emergency fund for, and how to build emergency fund savings.
What is anemergency fund, and why is it important?
As the name indicates, your emergency fund, also known as emergency savings, is to help you weather unexpected expenses and emergencies. Having a stash of cash to fall back on when "life happens" means you won't have to rely on credit or rack up debt to resolve your situation.
It's the difference between having your car break down unexpectedly and leveraging cash you had already put aside for this exact purpose - versus maxing out acredit cardand figuring out how to pay for it later.
The latter scenario means an additional or highercredit cardpayment, more debt, and more money woes to worry about. And more importantly, you are now further away from yourfinancial goals.This can be majorly demotivating.
So essentially, you can think of youremergency fundasa form of insurance. An insurance policy that you create for yourself that keeps your financial goals intact.
Emergency fundexamples
There are a lot of things that happen in life that aren't expected. Not all of them are emergencies, but it qualifies as one if (1) you weren't expecting it, and (2) it is something that has to be done, not something you just want to buy. Here are some emergency fund examples.
Your car breaks down
This is an emergency because you need your car to transport you to work, school, and other activities. Without it, your life could become challenging very fast. So paying to fix a broken car is a high priority.
You need to pay to fix a leak in your home
If your sink or toilet is leaking, it's definitely an emergency. You need to get this taken care of as soon as possible because it could pose a danger or at least a major inconvenience to you and your family.
Covering costs for a flight to see a sick family member
Illnesses happen and we don't always know about them in advance. But if someone in your family becomes sick, you don't want money to stand in the way of you being able to see them or not. Anemergency fundgives you the chance to go and see this person even if they're far away.
How is anemergency funddifferent from a sinking fund?
While youremergency fundacts as money to bail you out of unplanned life circ*mstances,a sinking fund is typically used for planned upcoming one-time or irregular expenses like routine car maintenance or vacation savings, for example.
Your sinking fund can then be broken into specific sinking fund categories.
How muchemergency savingsshould you have?
Ideally, your goal should be to have 3 to 6 months' worth of your essential living expenses in emergency savings. Before you think this is unattainable, it's important to know that this refers to your "basic living expenses."
Essentially, how much do you need at a minimum to pay for your food, housing, coreutilities, and transportation? Is that number sounding more attainable?
The thing is, when everything is nice and rosy in our lives, we tend to get comfortable with spending money on "nice to have" items. However, youremergency savingsreally focuses on your "must-haves," which are essential to your life and survival.
Keep in mind that youremergency fundmight need to be broader than just your basicliving expenses. It's all about recognizing what might come up and accommodating that as you build your fund up.
For instance, if you are driving a 10-year-old car, it's more than likely going to need majorcar repairssoon. So you'll want to build the cost of that potential repair outside of a routine service into your savings plan.
Some emergency fund examples include paying formedical billsdue toillness,home repairs, unexpectedrentcosts, and more.
By having a savings plan in place, what could potentially be emergencies are now mere inconveniences.
That being said,a good first milestone to set is to go about saving $1,000.This can cover most basic emergencies and is a good amount to have if you need to focus on other pressing financial goals like paying downhigh-interest debt.
In a way, anemergency fundgives you the chance to provide yourself withpersonal loanswithout needing to pay or adddebt paymentsto your life.
Once you have your 3 to 6 months savings in place, you can consider getting to 12 months of emergency savings!
Emergency savingsgoal if you are single
If you are single, the more you have in savings, the better, so setting a goal of at least 6 months would be wise. This is simply because, as a single person, you might not have anyone else to fall back on for financial support.
Emergency savingsif you are married
If you are married or in a relationshipwith a second income to fall back on, you can start with 3 months as a goal and raise it to 6 months once you reach 3 months of savings.
3 months because there are two incomes, and it is less likely that you would both be out of a job for the same amount of time, for example.
I will, however, stress that the more you can save for emergencies, the better. A year's worth of savings would be incredible to have, especially during economic uncertainty likea recessionandcovid-19.
How do you build anemergency fund?
Putting away 3 to 6 months of income for emergencies sounds like a lot. Still, start with saving a little of yourpaycheck. You can save over time until you eventually reach your goal without changing yourlifestyletoo much.
Remember, the amount of money you are saving is to cover 3 to 6 months of your basicliving expenses, so your housing, your food, and your transportation NOT your non-essentials and nice-to-haves.
If an emergency comes up, you should leverage youremergency fundand then plan to replenish it later. Here are some key ways to build youremergency fund:
Come up with the amount you need to save
To determine how to build emergency fund savings, you will need to calculate 3-6 months of youressentialliving expenses. Remember, basicliving expensesinclude your housing, food, medical expenses, etc. So, let's say the total amount of your essentialliving expensesis $2,000 a month.
You calculate $2,000 by the number of months you need to save for, such as 3-6 months. This means you will need to save $6,000-$12,000 in youremergency savingsaccount to cover yourliving expenses. If you're unsure about this, use anemergency fundcalculator.
This may sound overwhelming, but you can ensure you can cover your basic expenses by working towards this goal. Make this into smaller goals instead of focusing on the big goal.
For example, make it a goal to save your first $1,000 towards youremergency fund. This is an easier goal to attain. Eventually, you will build up youremergency savingsto the needed amount formonths of expenses.
Emergency fundcalculators
Anemergency fundcalculator can help you decide how much money to save based on your expenses and the amount you can save. Here are some of our favorites:
- PNC Bankemergency fundcalculator
- Allyemergency fundcalculator
- Fifth Third Bankemergency fundcalculator
Build saving into your budget
The easiest thing to do when wondering how to buildemergency fund savingsis to make saving money a part of your budget.
Make it a goal to keep a certain percentage of your pay or a set amount each week towards youremergency savings. If you happen to get abonusfrom work, you can include that money in your savings, too.
For instance, you couldsave 10-15% of your payor a set amount of $50 every week. Another simple way to start saving is tostart living below your means.
By includingregular savingsinto your budget, you will quickly bulk up youremergency fundand be prepared for unexpected events.
Automate your finances
To prevent the temptation of spending money rather than saving it, you shouldautomate your finances. Automating your finances means you set up paying your bills and savingsdepositsto be paid automatically.
For example, you can set up automaticdepositsinto youremergency savingsaccount through your employer. You can also set up automatic transfers through your bank to ensure youdepositinto youremergency fundregularly.
Automating your finances can prevent money mishaps and help you save money easier. If you haven't, set up apaycheckdirect deposit, too.
Save refunds and bonuses
It's easy to blow throughtax refundsand pay bonuses, but that is money that can increase youremergency savingsquickly. Rather than shopping,depositthat additional income into youremergency fund.
Think of it as an ace in the hole for when life throws you a bad hand, such as an unexpectedjob loss. Saving your refunds and bonuses can prevent you from racking upcredit carddebt and having to borrow money from friends or family.
Where should you keep youremergency savings?
Youremergency fundshould be easily accessible andliquid. This way, you can get to it when you need it without having to wait or take a liquidation hit.
Keeping that in mind, don't tie your savings up in the stock market or in real estate. Thebest placeto store youremergency moneyis an interest-bearingsavings accountor acertificate of deposit.
Is spending youremergency savingstempting? Consider setting up automaticdepositsto a bank account at adifferent banknot connected to your primary checking account. Also, skip the checks anddebit cards. Make it as easy as possible to avoid temptation.
You can start building youremergency fund!
Having anemergency fundis essential and should be part of everyone's overall financial plans. You now have some emergency fund examples and some ideas for how to build emergency fund savings. Make saving for anemergency fundone of your top10 money moves to make this year!
The last thing you want is to be set back financially by not being prepared to handle things when life happens. So get started with saving for your fund today.
