How to Build an Emergency Fund
Jul 12, 2022
2 min read
In life, it鈥檚 impossible to avoid the unexpected 鈥� whether it鈥檚 an overheating radiator or an emergency medical bill. Yet, many people fail to invest in a proper emergency fund. More than half of Americans would be unable to pay an unexpected expense of $500. Consider these emergency fund savings tips to be prepared financially for an emergency.
What Is an Emergency Fund?
An emergency fund is a type of savings account, but not all savings accounts are for emergencies! You might be saving for your child鈥檚 college tuition, a new car or even that dreamy kitchen renovation.
Emergency funds are decidedly less fun, but absolutely critical to secure your financial future. A broken dishwasher might just be a $1,000 inconvenience 鈥� or it could be a serious setback. What about if you lost your job, had emergency surgery or experienced serious property damage? That鈥檚 a costly recipe for debt and stress. An emergency fund, which is its own dedicated savings account, can give you peace of mind should the unexpected occur.
How Do I Build an Emergency Fund?
Most people know they should have an emergency fund. But some simply don鈥檛 make enough money to start one, while others just it put off. For those in the first group, look for ways to make extra money in the short term. Work overtime, drive for a rideshare company, take on freelance work or sell items you don鈥檛 need. Your goal is to build a savings fund sooner, rather than later 鈥� you never know when your next emergency will be.
If you have the income to start an emergency fund now, stop avoiding it. The best way to begin is to factor in the fund when you create your next monthly budget, and build your emergency fund as fast as you can. Now鈥檚 a good time to review your discretionary funding and see what you can cut back on 鈥� then redirect that cash to your emergency fund. Ideally, you鈥檒l kickstart your fund with a larger 鈥減ayment,鈥� then schedule regular monthly contributions to your dedicated emergency fund savings account.
How Much Should I Save for My Emergency Fund?
It鈥檚 different for every person. Start with what you can afford, and add to your emergency fund on a regular basis until it鈥檚 fully funded. You might also consider contributing unexpected cash, like gifts or bonuses. A well-stocked emergency account should include three to six months of expenses. For example, if you have $2,500 in monthly expenses, then you should have between $7,500 and $15,000 stowed away.
Consider a longer-term emergency fund if you happen to be your home鈥檚 sole earner or if your
career comes with a fluctuating income. Just imagine if you have several slow months that coincide with a large, unanticipated expense. With savings set aside, you鈥檒l be better prepared to cover the costs. Parents, too, should establish a larger emergency savings fund. When there are kids involved, any financial crisis can feel drastically more stressful.
Should I Invest My Emergency Fund?
It can be tempting to invest your emergency savings in mutual funds or other assets, but resist this urge. The best thing you can do is keep it in a simple savings account with no risk of loss.
The goal of an emergency fund is to provide you financial security, and you don鈥檛 get that if your fund becomes a financial investment. Plus, keeping a simple savings account makes your fund more liquid, allowing you to withdraw at short notice.
When Should I Spend My Emergency Fund?
Most financial 鈥渆mergencies鈥� aren鈥檛 true emergencies. If your car tires are four years old, you鈥檒l likely need to replace them soon. If it鈥檚 October, the holidays are around the corner, and you should budget for additional spending. These circumstances aren鈥檛 the kind of dire, unexpected events your dedicated fund will carry you through. Plan for known financial needs without using your emergency fund, and reserve that money for true emergencies.
Your Emergency Fund Is an Emergency!
Don鈥檛 delay planning your family鈥檚 emergency fund a second longer. Contact your Farm Bureau agent or advisor today, and ask them about smart budgeting tools that can help you build up your nest egg.