In this topsy-turvy world, we never know what’s going to happen next. Changes come at the drop of a hat and they can greatly affect our finances. An emergency fund can help us keep our heads above water at difficult times.
Building an emergency fund takes more than just stashing money away. It involves making the right investments to make your money work for you. Keeping that in mind, here are some tips for how you can build some savings that will help out on a rainy day.
Why Building an Emergency Fund Should Be a Top Priority
An emergency fund is a bank account set aside for large, unexpected expenses including:
- Medical expenses
- Home repairs
- Major car repairs
They create a financial buffer that can keep you afloat in times of crisis without forcing you to rely on credit cards or high interest loans. Resorting to these methods can result in you getting further into debt instead of climbing out of it.
What are the Best Ways to Build an Emergency Fund?
Here are some steps for building an emergency fund that you can rely on:
Calculate the Total You Want to Save: The amount of money you are saving should add up to six month’s worth of expenses. Nerd wallet provides an emergency fund calculator that can help you arrive at this total.
Set a Monthly Goal: Setting a monthly goal will get you into the habit of saving. One way to do this is to set up an automatic transfer that will deposit a certain amount into your emergency fund account every month.
Set Aside Spare Change: When you break a $20, stash the $1 and $5 bills that you get as change in a jar. When the jar fills up, deposit the money into your account. If you don’t carry cash, you can also use a mobile app to make automatic transfers based on the rules you make.
Disperse Your Direct Deposits: If your employer deposits money directly into your bank account, you may be able to arrange these deposits in such a way that they break up into different accounts including your emergency fund account.
Save Your Tax Refund: You can take your tax refund and deposit it directly into your emergency fund account to boost your stash. Another idea is to adjust your w4 so you will have less money withheld. Then you can direct deposit that amount into your savings account.
Assess and Adjust as You Go: After a few months, it’s a good idea to check in and see how your funds are doing. You may need to add more, especially after a major expense like a marriage, a move or a medical emergency.
Keep Emergencies Separate from Everything Else: Once you have saved up enough in your emergency fund, you may want to open another fund to save for vacations, clothing, etc. Whatever you do, it’s important not to mix up your emergency savings with your other goals. This can lead to your account becoming depleted without your realizing it.
How Much Should I Be Putting Away?
The right amount to put into your emergency fund can vary from household to household. Ideally, you should be stashing enough to cover three to six month’s worth of expenses but any amount saved is good. Even $500 can help out in tough times.
It’s okay to start small. The important thing is that you start.
Best Savings Account for Your Emergency Fund
If you are stashing money, you will want to invest in an account that helps grow your money. Unfortunately, most of these accounts have specific withdrawal periods forcing you to pay a penalty for early withdrawal.
However, there are certain types of accounts you can invest in that will yield interest without withdrawal penalties. These include the following:
A Savings Account with a High Interest Rate: Any savings account with a high interest rate will be ideal. That way, your money will be growing and you will have easy access in case of emergency. It will also serve as a way to keep your money separate from your main bank account.
A High Yield Savings Account: These accounts are federally insured up to $250,000 making them safe investments. They earn interest and you can access money for withdrawals or transfers at any time.
Best Programs to Follow
There are programs that offer emergency funding to those who qualify. The Graduate Student Government Emergency Fund Program, for instance, is designed to help students with unforeseen expenses that result from crisis situations. It offers limited help for financial setbacks.
The funding is limited to $700 per academic year and students must fill out an application to qualify.
There are also some businesses that provide emergency funding to their employees. The Gundersen Medical Foundation provides the Employees Helping Employees Emergency Fund. It involves employees donating funds to help co-workers who have been hit by national emergencies.
Emergency situations happen and an emergency fund can help you be financially prepared for the worst. Set aside a bit of money on a regular basis and you will soon be in good shape to reach your goals. We wish you the best of luck with whatever life throws at you!