What Is an Emergency Fund, and Do I Need One?

Budgeting your money is the key to financial freedom and having a good credit score, but did you know an emergency fund is essential?

Many people overlook the need for an emergency fund until something bad happens, and they don’t have the money to cover it.

Not having an emergency fund can create credit card debt, or make you incur other debts, causing more financial strain.

What Is an Emergency Fund?

An emergency fund is money in a separate account, such as a savings account, that you only use for emergencies.

Ideally, you’d only use the money for situations including:

• Job loss
• Falling ill
• Major accident
• Loss of a loved one

You should have a separate account for other emergencies like your car breaking down or storm damage to your house.

How Much Should an Emergency Fund Have?

In a perfect world, you should have three to six months of expenses in your emergency fund. This means adding all fixed or necessary expenses and multiplying them by three or six. The more money you have saved, the better your chances of surviving the issue financially.

Since a fully funded emergency fund will likely take time, consider a goal of at least $1,000 to get you through minor emergencies while consistently saving a fully funded emergency fund.

Where Should You Put an Emergency Fund?

It’s best to put your emergency fund somewhere separate from your spending money. For example, don’t put your emergency money in your checking account. You could unknowingly spend it, leaving you with nothing in an emergency.

The best place to put your emergency fund is in a high-yield savings account or any other liquid account that pays interest, even if minimal, and at a bank separate from your spending money. This way, you won’t be tempted to use the funds for other purposes.

Who Needs an Emergency Fund?

You might think you don’t need an emergency fund because you have extra room in your budget. Unfortunately, life is unpredictable, and when the worst happens, you’ll wish you had money saved.

Everyone must have a fully funded emergency fund, no matter their income, financial status, or anything else.

How to Save an Emergency Fund

If you’re already cutting it close with your finances, consider these simple ways to save an emergency fund.

• Make small, consistent contributions to your savings account
• Set small goals and increase them as you reach them
• Set up automatic transfers to your savings account
• Bank windfalls

Refunding Your Emergency Fund

Keep in mind, if you must use your emergency fund for a true emergency, be sure to refund it. This will obviously take time, but start at square one and set goals to save money again. If you only use a portion of the amount saved, set a goal to get the balance back where it was before you had the emergency.

Final Thoughts

An emergency fund can save you financially during difficult times in your life. The last thing you want to worry about is money when you’re experiencing a crisis. Having money saved can help you focus on recovery or helping others while knowing your bills are paid.