A reported 57% of U.S. adults are unable to pay for an unexpected expense of $1,000. This concerning statistic points to exactly why it’s so important to have an emergency fund. Because in life, you are bound to have unexpected expenses, and when that time comes, will you be ready?
Why an emergency fund?
In today’s world, things can change in an instant. Your water heater breaks, your spouse gets unexpected medical news, your car breaks down, or you even get laid off from your job. These types of unexpected life changes can leave you feeling stressed financially if you aren’t prepared.
An emergency fund is money set only to be used in times when your financial life has changed in a moment’s notice. With an emergency fund, you can be prepared for major expenses, which can in turn help eliminate financial stress during those periods.
How much is enough?
This is an age-old question that can be different for each individual. That’s because to calculate an emergency fund savings you are comfortable with requires taking into account your income, financial situation, lifestyle, and current expenses, among other factors. For example, someone who owns a home and is paying for their child’s college tuition likely has a larger financial burden than someone with no dependents and is a renter.
It can be helpful to look at your emergency fund in terms of your monthly expenses. Some believe it’s best to have enough money saved to cover 3-months of expenses, while others see an emergency fund of 6-months expenses as best. The balance here is having enough money for emergencies, but not having too much in low-interest bearing accounts that you are wasting opportunities for a return on your money.
Where should you keep an emergency fund?
A key component of an emergency fund is that it’s liquid, meaning, you have easy access to the money when you need it. The most liquid form of money would be cash, but it’s not necessarily wise to store large amounts of cash in your home, plus you won’t be getting any returns on your money sitting under your mattress.
Instead, consider putting your emergency fund into a savings account. It’s important that this account is insured by the Federal Deposit Insurance Corporation (FDIC), which insures most savings accounts for up to $250,000 per depositor, per institution, in principal and interest. This also goes for money market accounts, which may offer higher interest than traditional savings accounts, but can have restrictions on minimum deposits and account balances.
Although, it’s probably not a prudent decision to keep your funds in a money market fund (which differs from a money market account), as it’s not FDIC-insured and can lead to a loss of money.
Saving for the unexpected
An emergency fund is for just that: emergencies. So don’t worry about getting little interest on your savings or how you could be spending it. Instead, know that by keeping an emergency fund you are protecting yourself and your family from unexpected expenses. Because when it comes time to pay for that hospital bill or car transmission you weren’t expecting, you don’t want to be caught off guard.
Remember, the path to transformation is a marathon, not a sprint. Stay committed, keep your goals in sight, and reach out to us for support. You got this.