Emergencies are an inevitable part of life. Whether it’s your car, your health, or your home, emergencies can be scary and costly.
There’s good news, though: An emergency fund can help you offset the cost and stress of the unexpected tremendously. All you need to do is a little bit of prep work.
Regardless of your age or occupation, a major part of financial responsibility is setting up an emergency fund. Doing so will help you avoid racking up high-interest debt that could cost you tens of thousands in the long run.
Creating a major savings account can seem intimidating, but we want to help. Here’s a look at what it takes to set up an emergency fund, how much you should put in it, and when you should — and shouldn’t — dip into it.
Why you need an emergency fund
You likely have a credit card in your wallet, but there’s one good reason why you shouldn’t rely on that card for emergencies: Interest.
Let’s say your car breaks down and you need to replace the engine. Putting $4,000 down on a credit card with an average interest rate of 21.21% will result in $432 of interest charges over 12 months. And that doesn’t include late payment fees.
Or what if you learn your home’s foundation has a crack in it and needs to be repaired? That could cost up to $15,000. And if you put that on the same credit card and pay it off over two years, your total bill comes out to around $18,215.
Having an emergency fund set aside for moments like this takes the emotional and financial stress out of handling life’s little curveballs.
How to set up an emergency fund
Now that you know why you need an emergency fund, let’s talk about how to set one up.
Start by revisiting — or creating — your monthly budget. Factor in a small amount of money to be set aside each month that goes into an emergency savings fund.
Cash is fine, but a savings account is your safest bet. Just make sure this account is easily accessible, or that money can be immediately transferred into your checking account so you can pay upfront for unanticipated bills. Ask your preferred financial institution if they offer any high-yield savings accounts that would allow your money to grow over time.
Every few months or so, try to increase your savings deposits — even if it’s just by $20, it will make a huge difference in your overall savings.
How much money should you have in an emergency fund
There’s no one right amount you should have in your emergency fund — it’s based more on your lifestyle, location, and family size.
Ideally, you should have between three and six months’ worth of living expenses tucked away. On the off chance, you lose your job or can’t work, this will allow you to pay for food, shelter and other necessities until you have a steady income again.
This is not an easy feat to accomplish, but consistency is key. Along with the monthly contributions we discussed, try to put any extra or unexpected income into your fund.
When should you use an emergency fund?
The most important thing to remember about your emergency fund is that it isn’t for snacks after a late night out or concert tickets to see your favorite band. It’sThis is for emergencies only.
You should use it for unexpected costs associated with your basic life necessities.
Here are a few instances you should use your emergency fund for:
- You or a family member incur unexpected medical expenses. You should budget for the basic medical expenses, like recurring prescriptions and annual dental checkups, but emergency surgeries or ER visits can — and should come out of your emergency fund.
- Your car breaks down.
If you get a flat tire or your engine dies, your emergency fund can cover that. If your vehicle is totaled or repairs would cost more than it’s worth, consider putting all or part of your emergency fund toward a new one. - Your home floods. This is another instance where building an emergency fund could help you react quickly and wisely to the unexpected.
All of this is to say that your emergency fund should be used to keep you out of crushing debt. If you need to use it to pay a bill here and there, that’s fine. But Try to pay yourself back, though, so you always have a cash cushion to fall back on.
If you have any questions or need help setting up an emergency fund, contact your preferred financial institution today.
FAQs
An emergency fund should cover three to six months' worth of expenses, but saving that amount takes time. To help get you started, begin with small goals, such as saving $5 a day.
Is there a set amount for how much a person should have in their emergency fund? ›
While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.
Why should you save $500 dollars for an emergency fund? ›
This amount can over a lot of common emergencies or unexpected expenses: a speeding ticket, an urgent care clinic visit, many car repairs, unexpected school-or extracurricular-related expenses, an appliance repair, and so on. Once you save $500, try saving $1,000.
How much money should you try to save in your emergency fund quizlet? ›
As an adult, you should have 3-6 months worth of money saved away for your emergency fund.
What is the 50 20 30 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
Is $10,000 enough for emergency fund? ›
When asked how much money they'd need to save for a financial emergency to avoid additional stress, 40% would feel comfortable having a modest amount — below $2,500 — set aside. 21% say they'd need at least $10,000 saved to feel secure.
Where is the best place to put cash right now? ›
CDs, high-yield savings accounts, and money market funds are the best places to keep your cash when it comes to interest rates. Treasury bills currently offer attractive yields at the lowest risk.
How much cash should I keep at home in case of an emergency? ›
It's a good idea to keep enough cash at home to cover two months' worth of basic necessities, some experts recommend. A locked, waterproof and fireproof safe can help protect your cash and other valuables from fire, flood or theft.
How much to save per month? ›
For many people, the 50/30/20 rule is a great way to split up monthly income. This budgeting rule states that you should allocate 50 percent of your monthly income for essentials (such as housing, groceries and gas), 30 percent for wants and 20 percent for savings.
How much are 6 months of living expenses? ›
To prepare for income shocks, many experts suggest keeping enough money in your emergency fund to cover 3 to 6 months' worth of living expenses. So if you spend $5,000 per month, your first emergency fund savings milestone should be $2,500 to cover spending shocks.
How much emergency fund should I have? Sudden car repairs, medical emergencies or job loss can all lead to unexpected debt if you're not prepared. It's difficult to predict how much these or other emergencies could cost — but three to six months' worth of expenses is a good goal.
What are the top three careers reported among millionaires? ›
Dave Ramsey on X: "Top 5 Careers of Millionaires: 1. Engineer 2. Accountant (CPA) 3. Teacher 4.
What is the second thing to save money for? ›
Second, we save for purchases. Third, we save for wealth building. Purchases and wealth building are fun, but we can't do any of that until we cover the basics—the emergency fund. This is a savings account set aside and never touched except for emergencies.
What is the first ingredient to building wealth? ›
1. Earn Money. The first thing you need to do is start making money.
What is the first thing you should save for? ›
The first thing you should save for is your retirement fund. Your income levels greatly affect your savings habits. Americans typically maintain a very high savings rate. When it comes to saving money, the amount you save is determined by how much you have left when all your spending is done.
Is $20000 enough for an emergency fund? ›
If your essential bills come to $6,667 a month or less, then you may be well-protected with $20,000 in the bank. But if you're a higher earner who spends $8,000 a month on essential expenses, then your minimum emergency fund target should really be $24,000.
Is $12,000 enough for an emergency fund? ›
While there's no one-size-fits-all goal for everyone, many personal finance experts recommend saving three to six months' worth of essential expenses. In our example, that goal would fall between $6,000 and $12,000.
Is $15000 enough for an emergency fund? ›
Most of us have seen the guideline: You should have three to six months of living expenses saved up in an emergency fund. For the average American household, that's $15,000 to $30,0001 stashed in an easily accessible account.
How much should you eventually have in your emergency fund? ›
People in stable jobs are recommended to put away 3-6 months' salary into their emergency fund, whereas people with lower job security are recommended to save 6-12 months' salary. A stable income ensures a consistent and bigger emergency fund. The number of earning members in the family also matters.
