Emergency Fund

Emergency Fund Amount

A general rule of thumb is having 3 to 6 months of living expenses in savings. This article will explain the reasons why this is considered a good emergency fund amount and give some suggestions about how to go about saving.

Why do you need an emergency fund account?

The first thing to consider is why you are building an emergency fund in the first place. As with everything else, there are exceptions, but for most people,

it’s because they don’t want to start getting into debt if something were to come up unexpectedly that costs more than their monthly income can cover.

It answers the question, “What happens if I lose my job?” or “What happens if I’m injured and have to seek medical attention?”

Benefits of an emergency fund account

If you have enough money saved up, then you won’t need to do anything drastic, like taking out a loan or a credit card when there is a financial emergency. With an emergency fund account, you can just sit tight until you get back on your feet.

Even if your savings is only enough to cover 2 or 3 months, it’s still worth having in case something happens out of the left field that takes longer to resolve than expected.

If you need even more money saved up, then consider how long it would take you to find another job if the situation ever arose where you lost yours.

Important considerations when opening  an emergency fund account

Easily accessible

In order for this emergency fund to be useful, it needs to be easy to access. You don’t want it down by the lake with a cute little sign saying, “Break glass in case of emergency.” Ideally, whatever form your savings account is in should not have many restrictions so that you can get at it easily.

Some people even opt to invest the money in order to earn interest out on it. By putting your extra money into mutual funds or other forms of investments, over time, they will grow larger so that if something unexpected comes up, you’ll have more than what’s needed.

This, however, is not recommended until the point where you have an emergency fund large enough to cover at least one year of expenses safely tucked away for safety.

Saving in the correct account

Some people keep their savings in a checking account, but this doesn’t work so well because if you’re down to $0 and there’s some kind of financial emergency, it will be tempting to withdraw from your savings account instead of using the credit card or putting it on another loan.

Another option for an emergency fund is keeping the money under your mattress. This may have worked back in the olden days when banks were made of stone and loans were given out by dragon lords.

But nowadays, the interest rates on simple savings accounts are pretty good, and it’s much safer than stuffing your money in a box under the bed.

Determining how much to save in your emergency fund account

A useful tool to use when determining how large an emergency fund should be is the household budget. If you know approximately how much money your household takes in each month and how much goes out, then you can take a look at the difference and try to figure out what size of an emergency fund would make sense.

For example: If your family brings in $5,000 per month after taxes and spends $4000 per month on bills, groceries, and other things that cost money, then you’d have about $1,000 extra to save.

You can choose whatever method of saving works for you. But you should aim to save as much as possible and as quickly as possible to make sure that you have enough saved up when you need it.

How often should I withdraw from my emergency fund account?

One thing people are often concerned about with building an emergency fund is that they’re just going to lose all of it. Once the money is in your savings account, you may not feel like it’s at risk, but in reality, if there’s a financial emergency, you could easily withdraw from your savings rather than apply for a loan or use a credit card.

This means that in order to truly protect yourself in case of an emergency, you need to be sure that you won’t touch the money unless absolutely necessary.

Only withdraw when  there is an emergency

  • An easy way to accomplish this is by using something other than cash as your medium for saving up money for emergencies.
  • Many banks will let you open up a savings account with no minimum balance, and some even give out free calendars, pens, or teddy bears when you sign up for an account. Even though these items are worth far more than the amount of money you’re saving up, at least they’ll serve as a reminder that this extra money is for emergencies only.

Tags

worth of living expenses
financial goals
emergency savings
job loss
checking accounts
months’ worth of expenses
retirement savings
savings goal
started saving
months worth of living
personal finance
high interest
monthly expenses
car repair
money market accounts
pay off debt
financial experts