Learn how much you should save in case of an emergency.
Emergencies are unpredictable by their very nature. If this happens, financial stability may suffer. If you’re not prepared, a sudden illness or accident, unexpected job loss, or even unexpected home or car repairs can disrupt your family’s daily cash flow.
Although it is not always possible to prevent emergencies, emergency savings can ease the financial burden of dealing with these unexpected situations.
What is an emergency fund?
An emergency fund is a bank or personal savings account used to cover or offset the costs of unexpected events. It should not be considered a savings fund or part of a long-term savings plan for college tuition, a new car, or a vacation. Instead, these funds serve as a safety net that can only be used in emergencies.
How much should you save?
The size of your emergency fund will vary depending on your living expenses, monthly expenses, income, family members, etc., but it is recommended that you save about 3 to 6 months of expenses. This amount may seem daunting at first, but it’s a good idea to set aside a small amount every week or every two weeks to reach your goal. You may also consider adjusting the amount based on payment obligations, family needs, job security, or other factors.
Where should you put the money?
It’s best to keep your emergency savings in an interest-bearing bank account, such as a money market or interest-bearing savings account, where you can access them easily without fees or penalties. The problem with putting emergency savings into mutual funds, stocks or other assets is that they can lose value if you need to access the funds quickly.
Emergency savings should be placed in an easily accessible account, such as a certificate of deposit (CD) or individual retirement account (IRA), to avoid early withdrawal penalties.
When should you use this money?
The goal is to use your emergency savings only for expenses directly related to unexpected emergencies. Setting a specific dollar amount for this account will help you know how much you need to save. Emergency savings lets you know how much you need to contribute to top up your account. If you need to withdraw money from this fund, it is important to start the recovery immediately. Remember: If you start saving now, the money you save today can go a long way toward meeting your needs when the next emergency arises.
