An emergency fund is crucial to covering unexpected expenses without going into debt. At some point you might need to come up with money for an unpredictable expense, such as a major car fix, a house repair, or a medical bill. A savings account dedicated to this purpose can absorb the financial shock of an emergency and provide security to you and your family without requiring you to take out high-interest loans.
How much should I keep in my emergency fund?
A good rule of thumb is to have up to three to six months of living expenses saved up. That may seem like a gigantic goal, but it’s a goal that you can focus on reaching over an extended period of time. Start with a smaller goal. Even just $500 saved could assist you greatly in a tight spot – you could focus on attaining that goal first before reaching the eventual goal of six months’ worth of expenses.
For example, you can save $25 a week starting today, and have $500 in twenty weeks. You can make that goal work with your income situation by lowering the amount of money saved per week.
How can I more efficiently save up for an emergency fund?
- Put it as one of your highest saving priorities: Track your monthly income and expenses. Prioritize saving for the emergency fund over payments that are not completely necessary. In your budget, distinguish discretionary spending – restaurants, entertainment, vacations – from recurring bills. Put your emergency fund savings in the second category, and treat it like any other recurring bill you have.
- Tax refunds: If you receive a tax refund, take advantage of the IRS’s Form 8888 and direct deposit part of your refund into your emergency fund account. The rest can go into your checking or retirement account.
- Ask for a rate reduction on credit cards: Look at the back of your credit card, call the number on the back, ask to speak to a supervisor over the phone, and request that your interest rate be reduced. Mention that you would like to transfer part of your balance off the card.
- Shop for better homeowner and auto insurance: Consider options such as Progressive, Geico, and AIG, among many others. Look for quotes on their websites and make the switch after determining which plan is the most cost-effective.
- Install a programmable thermostat: This is a great way to make your energy use more efficient and lower your cooling and heating bill in the process. Set the thermostat so that the furnace or air conditioner doesn’t run while you’re sleeping or at work.
- Use a list for grocery shopping: Not only will this save you money at the store by allowing you to focus on what you need most, it’ll also save you time.
- Splurge less: Cut out that expensive restaurant dinner and treat yourself to a fancy dinner at home.
- Use more efficient transportation: Setting up a carpool with someone who lives nearby, using public transportation such as a bus, or using energy-efficient transportation such as a bike can all help you dramatically lower your commute costs.
- Look at your budget and remove unnecessary monthly bills: Are you subscribed to Netflix or Apple Music while never actually using them? Unsubscribe!
Where should I keep my emergency fund?
Having the money immediately available is critical. For this reason, you’ll need to keep your emergency fund in an easily accessible account such as a high-interest savings account or money market account.
A high-interest savings account, insured for up to $250,000 by the federal government, is the best option for an emergency fund. Look for an account that has no balance requirement or monthly fees and an above-average interest rate.
Money market accounts are easy to use, offer higher yields, and lack penalties for withdrawals. You could also try a certificate deposit, or CD, which offer a fixed rate of return for a defined period of time, generally from one month to seven years. Consider taking out multiple CDs and spacing them out so the funds become available every 6 to 12 months without an early withdrawal penalty – a “ladder.” This will decrease the chance of receiving a penalty.
In conclusion, once you’ve set up your emergency fund, make sure to use it only for incidental expenses. It could help you out in the future!