An emergency fund is your own personal insurance policy when a financial emergency strikes. It’s emergency savings that you’ve put aside for a rainy day to help protect you from an unexpected financial blow. An emergency fund should be savings held in a separate account, reserved exclusively for emergencies, that are not used for any other reason. Benchmark Federal Credit Union has many savings options for your emergency fund needs, from Basic Savings to High Yield Money Maker and Money Market Accounts. If possible, emergency savings are best placed in an interest-earning account that can be easily accessed without any penalties.
Why is an emergency savings fund important?
An emergency savings fund can help better prepare you for a sudden unforeseen expense or loss of income. It’s a safety net to help when a financial crisis occurs. This might include an expensive home or auto repair, a sudden illness, unemployment, or a family emergency. Being well-prepared with adequate emergency savings can help reduce the impact of a stressful financial situation.
How much emergency savings do I need?
Now that you have a better understanding of why you might need an emergency fund, let’s talk about how much you should save. Your goal for emergency fund savings depends a lot on your income and spending. There’s no one size fits all approach to emergency funds. Most experts suggest an emergency fund should have at least three to six months of living expenses. This would include everything you might need to pay for over a three-month or six-month period if you had no income. Expenses such as mortgage or rent, utilities, food, debt and loan payments, insurance payments, educational expenses, transportation, and other monthly personal expenses and activities.
The more you earn, the more you should stash away. If you have a family to support, take that into consideration when determining your savings goal. If you can expand your emergency savings beyond six months of expenses, you’ll be even better prepared. This is a good idea if you’re in an industry where layoffs are common, or you don’t have a steady income. You should also aim for a higher amount if you or someone in your household has a chronic illness that may require extra medical care or more frequent medical visits.
Here are 3 easy steps to building an emergency fund
- Determine your emergency fund financial goal. Adjust your goal if your situation changes.
- Decide on the amount you can save each month as determined by your budget.
- Open and set up automatic payments into a dedicated emergency fund savings account each month.
Once you’ve hit your emergency fund savings goal, you can stop saving and feel secure in the fact that you have that emergency safety net on hand when the unexpected occurs. Use it only for emergencies, not for a tropical vacation, or to buy that new TV you’ve been eyeing. Open a different savings account for those expenses, such as a Benchmark Vacation Savings Account. Central to a successful and sustained emergency fund is replenishing your account If you’ve dipped into it. If you’ve had an unexpected and expensive home repair that put a dent in your fund, you need to work on replacing the money to get the account up back up to your goal amount. This is an important part of staying protected.
Ready. Set. Start saving for an emergency now!
According to a news report by CBS, fewer than 4 in 10 Americans have enough money set aside to cover even an unexpected $1,000 expense, such as a trip to the ER or a car repair. Even less have months of expenses saved. Saving for an emergency when you’re on a tight budget or living paycheck to paycheck might seem like an impossibility. Although you may only have a small amount to contribute each month and the task may seem daunting, you will be working towards your goal of security in the event of an emergency. Once you have a dedicated savings plan in place, you will be glad you made your emergency fund a priority. When life throws you a financial curveball and the unpredictable happens, you will be well prepared.