(DailyChive.com) – You’ve heard the expression emergency fund, but you may not know what that means. As inflation in prices and products continues to rise across the country, everyone should consider this, no matter their lifestyle, to achieve financial freedom. Below are the foundations of an emergency fund, what it means, and why you should start on one today.
What is an Emergency Fund?
The term ’emergency fund’ refers to money you have put away in a separate account or even cash, sometimes to use when unexpected expenses arise. This money should be used explicitly for needs and not wants. Below are some of the unexpected emergencies:
- Surgeries or medical treatments
- Automobile repair
- Home repair
- Job loss
You did not anticipate these events, but they came up, and now you need funds to get through them successfully. Planned events like tuition and down payments are not what you should consider an emergency. Those items are covered with savings and are two different funds with different purposes.
Those without an emergency fund find themselves in financial distress, which you must avoid by establishing and making this fund available. Your emergency fund should not be locked in an account you cannot access or will be penalized if you remove the funds.
How Much Should I Have in My Emergency Fund?
While it is hard to predict what type of emergency will come about at any given time, the emergency fund should have substantial money to sustain you in this event. The rule of thumb is to have at least six months’ income in your emergency fund. If you lose your job, you need money to pay your bills until you can secure a permanent job. This amount is usually enough to cover any other emergencies that can arise, like repairs and unexpected surgeries.
How Do I Save For an Emergency Fund?
Six months may seem like a lot of money to save all at once, but do not get overwhelmed. It is important to remember that you are building this emergency fund over time, just like a savings account.
Put Aside the Same Amount
Look at your current finances and the amount of expendable income you have after you get paid. Know what to put aside each paycheck and begin storing that in a separate account. Three types of accounts are available where you can keep your emergency fund that is easily accessible when you need it.
- Traditional checking account
- High-yield savings account
- Money market account
A traditional checking account can be easily accessible when needed, and you can even have a debit card linked to spend that money instantly. Checks are also available if you lose your job and must begin paying bills from this account.
A high-yield savings account can easily be linked to your checking account so that you can quickly move money each paycheck. There will be less temptation to spend this money since there isn’t a card or checks linked to the account, and you can access it anytime.
A money market account has the best of both worlds, with checks and debit cards available while offering a high-yield earning. The only drawback to a money market account is that you need a substantial balance to open the account initially.
Establish a Timeline
Once you know how much you can put away each paycheck, determine the amount of time it will take to reach your emergency fund goal. With each paycheck, make sure to move that amount of money to a separate account so that you do not spend it and it can build. This can be weeks or months, depending on how much you are putting away each check.
Start Building Your Emergency Fund
If you do not have an emergency fund or had to dip into it for an unexpected expense recently, use these steps to start building this fund to protect you financially when the unexpected happens.
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