What is an Emergency Savings Fund?
An emergency savings fund is a sum of money set aside by an individual, that exists to pay for unexpected but necessary expenses including: medical bills, home and automobile repairs, and even the loss of a job. We should view these funds allocated to an emergency savings account for true emergencies only. After all, unforeseen challenges happen to everyone. An emergency savings fund account prevents the stress that would set in if you can’t afford to pay the bill.
Fortunately, there are a variety of accounts an individual can open to dedicate to emergency funds. These include: high-yield savings accounts, money market accounts, Certificate of Deposits (CD), traditional bank accounts, or a Roth individual retirement account (IRA). There are numerous factors to consider when choosing the type of account that best suits you. It is important to do your research to see which account is most advantageous for your situation.
There is no simple answer as to a specific amount of money you should have tucked away in an emergency savings account. However, the experts do provide guidance, recommending funds totaling 3-6 months of necessary expenses. To determine what that amount looks like, estimate your costs for an average month including: housing, food, health care, utilities, transportation, personal expenses, and debt (we need to address current financial issues before saving for potential future ones). When estimating expenses, consider using a savings fund calculator.
Obviously 3-6 months in funds is substantial, especially when you’re just starting off. As a recommended strategy, view your emergency fund as a bill. Take a small amount out of each paycheck and transfer that to your emergency savings account. If you can consistently contribute to that account, building the balance is achievable.
When you’re starting off, remember that even $500-$1000 could significantly alleviate the burden of an unexpected emergency. Something is better than nothing. With emergency funds, a chaotic event becomes a manageable inconvenience.