What is an Emergency Fund? (How Much Should I Save)
With the COVID-19 pandemic, many Americans are asking the questions: “What is an emergency fund? Should I start emergency funds? How much should I have for an emergency? Pandemic or not, an emergency is bound to happen. It’s essential to prepare for it.
What is an emergency fund?
An emergency fund is a bank account with money set aside to cover large, unexpected expenses.
(Source: Nerdwallet)
What is an emergency fund used for?
You know the saying expect the unexpected. Your emergency fund is there to help you when the unexpected happens. Inevitably, it will. Just make sure that the emergency is urgent and necessary to address before dipping into the fund. A few examples:
- You lose your job.
- Car accident.
- Car breaks down and needs significant repairs.
- Emergency or urgent medical expenses.
- Unexpected travel due to family illness.
- Identity theft.
- Helping a friend or family member in an emergency.
Is $1,000 enough?
Yes, because you have to start somewhere. For many of us, stashing upwards of $10,000 is not realistic overnight or even in a couple of months. It’s better to have a goal of $1,000 than set a goal that feels so far-fetched that you don’t execute.
Imagine this: You have your $1,000 emergency fund. You have a bad day, and someone hits your car in the parking lot. You could see a lot of that fund disappear with one incident.
Ultimately, you want to build your emergency fund to cover expenses for the worst-case scenarios, like serious accidents or job loss.
How much savings should I have?
Some people say you should have three months of living expenses saved up. Others say 6-12 months. Decide what time frame makes sense for you and work toward that goal. You could always keep adding more when you reach that goal.
When you calculate how much you need to save, include all of your living expenses, including:
– Rent
– Utilities
– Internet
– Loan payments (think credit card or student loans)
– Food
– Health care costs
– Transportation
– Car Insurance
– Cell Phone Bill
– Household Items
– Health and Beauty Items (shampoo, body wash, etc.)
– Any other expenses that you can predict.
Add up these expenses and multiply by the number of months you decided. For example, if my expenses total about $2,000 per month, and I want my emergency fund to be for six months, my target amount would be $12,000.
Emergency Fund Calculators
There are also plenty of emergency fund calculators out there. You can try a few out. I really like Nerdwallet’s Emergency Fund Calculator because it’s simple and easy to understand.
Money Under 30’s Calculator can also be helpful if you want to factor in how stable your job.
If you want a thorough calculator, Practical Money Skills may be the one to try. Their calculator gives you the option to either add a total amount of expenses or break it down into 30 categories of expenses.
There’s no right or wrong with calculating how much you need to save up. Don’t overthink it.
It can be as simple as opening up a Google Sheet or Excel spreadsheet and adding up your expenses. Multiply by the number of months you would want to be able to live off your fund. And make a plan to save that amount over a period of time that fits with your budget.
Where Should I Put My Emergency Fund?
Your emergency fund should be accessible but not TOO accessible. And ideally, it is generating some income in a high-interest savings account.
Having quick access is vital since you don’t know when the emergency will happen (hence the word emergency, right?). But the bank account should be separate from the one you use for your expenses.
I really like Capital One’s 360 savings account, but there are many options out there.
How to Build Your Emergency Fund
Saving money isn’t easy. There’s a reason why 40% of Americans couldn’t cover an unexpected expense of $400. And for many of us, low-income wages mean that savings thousands may not be feasible.
While researching, I found a few resources to help guide you on ways to build your emergency fund. I recently looked at all my bills, canceled services I don’t use, and called a few companies to negotiate. I saved money on my internet and car insurance just by spending some time researching.
10 Ways to Build an Emergency Fund (Living Well Spending Less)
How to Build an Emergency Fund Quickly (Frugal Living Mom)
Savings Challenge
Saving up thousands of dollars can seem overwhelming. Break down your savings goal by creating a monthly goal. Based on your budget and other expenses, calculate how much you can save each month and set up a direct transfer from your main account to another savings account that holds your emergency fund. If you set it up for automatic transfer, it’s one less thing to think about, and you’ll be less tempted to spend it.
For some, it may be helpful to try a Savings Challenge. If you think of it as a challenge, you may be more likely to stick to it (if you’re at least a bit fueled by competition). A few ideas:
– Plan to save your income tax return for your emergency fund.
– Use an app like Acorns to round up your purchases and start saving without barely noticing.
– Try a 31 Day Money Savings Challenge (Trials & Tresses)
– Try a Money Savings Challenge for Small Budgets (Simple Money Mom)
– Try a No Spend Money Challenge (Debt Free Forties)
– Try Saving $1000 in 3 Months With This Money Saving Chart (Living Low Key)
