How Much Should I Have In An Emergency Fund?
Unexpected financial situations are bound to happen from time to time, whether it's a medical bill or you lose your job. That’s why emergency funds are essential. Having a financial safety net can help you be prepared for any unforeseen expense or situation you may face.
Here’s a closer look at how emergency funds work, how much you should have in one, and how to build one.
How do emergency funds work?
Emergency funds are pools of money you can pull from if you face unexpected expenses or situations, like a home or car repair bill, medical bill, or unemployment. It can give you the peace of mind of knowing you have money available to pay for bills and basic living expenses should the need arise.
Why are emergency funds important?
Emergency funds are important because they can act as a safety net to help you cover costs and avoid going into debt if there's an unforeseen event. While everyone should have an emergency fund, it’s particularly important if you’re the sole earner in your household, own a home, or are self-employed.
How much you should save in an emergency fund
Many financial experts recommend saving three to six months’ worth of expenses in your emergency fund.
However, even if you don’t think you can save up that much, you should still build some sort of emergency fund. Saving something is better than nothing, and having cash can help if you’re in a financial pinch.
How to build an emergency fund
To build an emergency fund, you should first look at your monthly bills and expenses. Then, determine how much money you spend in a month. Multiply this by the number of months you’d like to have in your emergency fund. The answer can give you an idea of how much you should consider saving.
It’s also smart to automate your savings so that a designated amount will go to your savings account or emergency fund each time you get paid. Automation can make saving easier and more convenient, and you won’t have to think about the process. As long as you’re committed and consistent, you should be able to gradually save your desired amount.
Visit our page on how to build an emergency fund for an in-depth set of steps outlining the process.
Benefits of having an emergency fund
An emergency fund helps to protect your financial security while allowing you the freedom to enjoy life.
An emergency fund acts as a safety net, reducing the risk of relying on credit cards or other high-interest debt if something unexpected happens. It can keep you from dipping into your retirement savings or taking out a loan for costly bills or other unplanned expenses.
Furthermore, an emergency fund gives you peace of mind, knowing that you won't be left feeling desperate or financially damaged if a significant expense comes up.
Improves financial stability
When you have money saved up and ready for emergencies, it increases your overall financial stability. This means that if something unexpected happens, you will have the funds necessary to cover the expenses without going into debt.
This helps avoid large expenses that could otherwise put a severe dent in your budget or even cause financial instability if they need to be taken care of immediately. Since you’ll be ready, expenses won't be as burdensome on your wallet.
Whether it’s an unexpected medical bill, losing your job, or another type of financial crisis, having money set aside will reduce the worry and stress associated with these events.
Knowing that you don't need to worry about how you're going to pay for something can be a massive weight off your shoulders, which allows you to focus on more important things like family, work, or other priorities.
Helps you avoid debt
When unexpected expenses arise, it can be tempting to turn to credit cards or loans to cover them. However, this can lead to long-term debt that can be difficult or even impossible to pay off without taking drastic measures. Having an emergency fund may ensure that these situations won’t leave you in a worse financial state than before.
Increases your savings
By setting aside money specifically for emergencies, you can save more than if you had only one account for all your expenses. This can help ensure your savings are increasing over time, giving you more flexibility regarding long-term savings goals like retirement or college tuition payments.
Where should I keep an emergency fund?
When deciding where to store your emergency fund, research is essential to find the best option for you. Evaluate the options based on security, return on investment, cost, and how easy you can access the funds in an emergency.
Some options may include a savings account, an easily accessible money market account, or even a certificate of deposit (CD). If you want more for your savings, consider a high-yield account that pays out interest regularly.
Additionally, many financial institutions offer convenient tools like mobile deposits and online banking that make managing your emergency fund easy. Before committing to a specific strategy for storing your emergency fund, read up on the available options to choose the best one for your financial needs.
When should I use an emergency fund?
An emergency fund is a great tool to help you weather the unexpected. A dedicated emergency fund should be kept separate from everyday finances and used only when unexpected expenses arise. In an ideal world, the perfect time to use it would be never — but it’s there for those inevitable occasions that catch you off guard and cost more than anticipated. Emergencies like a layoff or medical emergency are prime times for using this reserve.
Building up an emergency fund should be your top financial priority, as it may help you avoid turning to alternatives like borrowing from friends. In essence, you should tap into your emergency fund when life throws you a curveball and you need financial help without compromising long-term financial stability.
What to do if you need money now
If you don’t have an emergency fund to cover an immediate expense, Advance America is here to help. We offer payday loans, installment loans, title loans, and lines of credit that you can apply for from the comfort of your home. Upon approval, you may be able to receive the funds in your bank account as soon as the same day you apply or within 24 hours. Visit Advance America today to learn more about the loan options we offer.