An emergency fund is a sum of money reserved for unexpected expenses that suddenly spring up. Although you can have this in cash, it would be wise to keep this money in a bank account simply because it is safer and also accountable.
How exactly does an emergency fund help?
An emergency fund comes to your aid when you need cash the most. It can help you pay for the things you need most without having to rely extensively on loans and credit cards. If you don’t have extra money when you need it, you will most likely apply for a loan. Loans come with high-interest rates. So do unpaid credit card bills.
Instead of paying this extra amount by way of interest, you can just as easily put aside a little money every month towards an emergency fund. If and when the time does come, you will be glad you did it.
Where should I invest the money I’m planning to save?
You have two options when it comes to investing your savings:
- Put them into a savings account: A savings account will keep your money safe. Apart from this, you will also earn a small rate of interest. Look for banks that offer a high rate of interest and invest your money there. Make sure that the account you are investing it into also allows you to withdraw the funds as and when you want. Keep this account separated from your usual banking account. You should not touch this money unless you have an emergency.
- Put them into a high-yield savings account: This type of account also allows you to withdraw your funds whenever you like but offer a high interest rate. This will give you an interest income as well. Moreover, these funds up to $250,000 are insured by the federal government.
If you have a large amount, you might be tempted to put your savings into a certificate of deposit (CD) as they promise a much higher interest rate. But keep in mind that once invested in a CD, you cannot access your funds like in a savings account. You will be able to withdraw your funds only after the maturity period.
Is there a minimum amount I should save every month?
There is no stipulated minimum amount to save towards an emergency fund. That said, you should build towards having a fund that covers about six months’ expenses. You can start by putting aside about $500 every month if you can. Or start with a smaller amount and increase it over time.
Keeping your goal in mind can help you save diligently. Having a few months’ worth of expenses saved up can help you get through some difficult times without having to rely on anyone.
How can I start building my emergency fund?
The key to building an emergency fund is to stay diligent and prudent. Here are a few steps that can help you set up and build your fund:
- Set your target: Calculate your monthly expenses and decide how much you want to keep in your emergency fund. A good starting point would be to work towards having at least six months of expenses in this account.
- Save every month: Once you have decided how much to have in this fund, you can calculate how much you have to save every month over the next year or two. Most people make the mistake of saving this money after all their expenses are met. More often than not, it never happens.
- Auto-credit into your account: Tell your bank to deduct this amount from your regular savings account or paycheck and credit it into your emergency fund account automatically each month.
- Look for ways to save: There are always ways to save that are overlooked by most people. The same purchase can be made using different portals. Look for payment options that give you discounts on purchases. Take the saved amount and put it towards your emergency fund.
- Save any taxes that are refunded: If you get any refund on your taxes, set these aside as well. Resist the temptation to spend this on something else. It will be worth it.
Having a few months’ worth of expenses saved up in an account can help you get through difficult circumstances. Look for ways to save money and start building your emergency fund today.