There will always be unexpected expenses in your life. They can come in the form of a car accident, the loss of a job, or a severe injury. An emergency fund can help to cover these unexpected expenses. Unfortunately, according to the Urban Institute’s research, 25.7% of families suffer at least one major income disruption every year. This can come in the form of emergency health-related expenses, an involuntary job loss, or major car repairs.
Building an emergency fund should be something that you are doing consistently to prepare for emergencies. You shouldn’t wait until you get a financial boost like a promotion to start. You can begin to build your emergency funds even if you are facing financial hardship.
Emergency Fund Basics
Experts recommend that your emergency fund has between three months to a year’s worth of expenses. The size of the fund will depend on your lifestyle and expenses. You are the only one who can determine the right amount for your emergency fund. Make sure to consider your income, job stability, debts, and future plans.
The emergency fund should only be accessed for unexpected necessary expenses. You don’t want to be depleting your emergency fund for extra items that you don’t need. The following items are good uses for an emergency fund.
- Reduced income due to job loss
- Medical emergencies
- Home repairs
- Car maintenance
- Unexpected taxes
Creating Your Emergency Fund
The first thing that you want to do when starting your emergency fund is to create a savings plan that you can maintain. Examine your monthly budget and determine a comfortable amount that you can set aside for your emergency fund. Have it automatically deducted from your bank account and put into a savings account.
As your fund grows, you may want to consider investing some of the funds. Once you reach $1,000 in your emergency fund, you will have a few other options available to earn more interest. Keep in mind that it is an emergency fund and you don’t want to have the funds tied up when you need them.
To build your emergency fund faster, contribute as much as you can to it each month. There may be some expenses that you can easily trim by adjusting your lifestyle. For example, you may realize that you eat out multiple times a week. You can save money by creating a budget for food and sticking with it. You may discover fees and monthly charges for things that you aren’t using that can be eliminated. Finally, look for discounts on the products that you buy and purchase items in bulk to save money.
You may be able to save money by reducing your monthly water bill and electric bill. Make sure that you turn the lights out when you leave the room. Reduce your water intake by taking shorter showers, turning the faucet off when you are brushing your teeth, and only running the dishwasher when it is full.
Savings Accounts and Money Market Funds
Getting started with a savings account is easy, but the interest rate on the accounts are low. The average savings account interest rate is 0.01 percent annual percentage per year. As your emergency fund grows, you will want to more interest on your money. There are some low-risk investments that have a greater return on investment than savings accounts.
Money market accounts will pay greater interest rates, but they do require at least $1,000. Money market accounts use your cash to invest in the market and generate an income at the end of the maturity date. Money market funds are short-term investments that are a good way to get extra cash while you wait for your savings to grow.
Some examples of money market funds include certificates of deposit, treasury funds, and municipal bonds. Do some research to determine if this type of option will work for you and how much you could gain by investing in one. Once the fund has matured, transfer your new amount of cash into a high-yield savings account to let it grow even more.
Emergency funds provide peace of mind
Creating an emergency fund can provide you with the peace of mind that you will be able to handle unexpected expenses. Whether you wreck your car or lose your job, an emergency fund can help you cover your bills until you get back on your feet. Creating an emergency fund should be a priority for everyone.
When unexpected expenses arise, no one knows how much they will be. You may have some costs that aren’t covered by your emergency fund. When this happens, it is important to know how to access funds when you need them. A convenient cash loan can help you out if you need money immediately.