What is an Emergency Fund and How to Build One

You never know when an unforeseen financial situation or expense can occur, such as losing your job or needing a car repair. With an emergency fund, you can cover these types of expenses and avoid financial hardship. Find out what emergency funds are, why you need one and how you can build an emergency fund so that you can be prepared for any unexpected situation.

What is an emergency fund?

An emergency fund is a pool of money you can pull from when you face an unforeseen expense, like a surprise medical bill or leaky roof that you never saw coming. An emergency savings fund may also help you in the event of job loss or a sudden income decrease. You can count on this fund when you’re in a financial downturn and are struggling to pay the bills.

Why should I have an emergency fund?

Emergency funds offer an immediate way to cover unexpected expenses. If you have one, you may be able to avoid high-interest loans and a cycle of debt. Here are a few other reasons you may benefit from an emergency savings fund.

You’re living off one income

If you only have one source of income, an emergency fund can give you some much-needed peace of mind. You can use it to help you get through a job loss or illness that makes it difficult for you to pay your monthly bills.

You’re self employed or own a business

As a self-employed individual or business owner, you won’t be able to collect unemployment benefits. With an emergency savings fund in place, however, you can protect yourself financially in the event that you lose your job or earn less money than usual.

You’re a homeowner

When you own a home, you have to pay for all maintenance and repair costs. Since your heater may stop working or your basement could flood at any time, an emergency fund is essential. Having a savings fund to cover repairs can make home upkeep a far less stressful experience.

Expenses an emergency fund can cover

An emergency fund is versatile, meaning it can be used to cover several expenses, such as:

Medical bills

With an emergency fund, you’ll find it easier to pay for the out-of-pocket costs of sudden medical bills for you or your family. You can use it to pay for doctor visits, procedures, and medications.

Car repairs

Chances are you depend on your car to get to school, work, the grocery store, and just about everywhere else you need to go. If it breaks down, your emergency fund can come to the rescue and help you get it repaired quickly.

Home repairs

If you’re a homeowner, your home might require a repair when you least expect it. An emergency fund is ideal if you need to cover the cost of a new furnace or roof, for example.

Unemployment

Losing your job is a lot less stressful when you know you have an emergency fund to hold you over for at least a few months. An emergency fund can help you meet your expenses until you find a new job.

Expenses you shouldn’t spend your emergency fund on

Your emergency fund is for emergency expenses or sudden expenses you didn’t plan for. While it may be tempting to use it on a new car, piece of jewelry, fancy dinner out, or vacation, doing so is not a good idea. You don’t want to end up in a situation where you have an emergency expense but not enough money to cover it.

How much money should I have in my emergency fund?

How big should an emergency fund be?” is a common question. Most experts recommend an emergency fund should cover three to six months’ worth of living expenses, but any amount can help. If you are only able to put one thousand dollars into your emergency savings fund, for example, having access to this money is better than having no extra cash.

If you’re the sole earner in your household, have an irregular income, or support a family, you should have more saved in your emergency fund than a single individual or someone with multiple sources of income.

Where do I put my emergency fund?

You should have a dedicated spot for your emergency fund. Ideally, you should place it in a high-yield savings account. A high-yield savings account is an ideal place for this fund because it tends to come with a higher interest rate and fewer fees than a traditional savings account. No matter where you decide to keep your emergency fund, make sure you can access it quickly and easily.

Can I create an emergency fund if I’m living paycheck to paycheck?

Even if you’re living paycheck to paycheck, you can still build an emergency fund. To do so, however, you might need to cut some of your expenses or increase your income. You may also want to create a budget that allows you to save for your fund based on your income and expenses.

When should I start building an emergency fund?

The sooner you start saving for your emergency fund, the better. If possible, start the process today. This way you’ll have a fully funded emergency fund to help you out the next time you face an unexpected expense, which can give you some much-needed peace of mind.

How to build an emergency fund

There are many ways you can build an emergency savings fund. Start as soon as possible with these steps.

Calculate how much money you’ll need

Take a close look at your monthly bills and expenses. Determine how much money you spend on all of them in a single month. Multiply this number by three, four, five, or six, depending on how large of an emergency fund you’d like. The answer you come up with will give you a figure to aim for.

Make a budget

A budget is a spending plan that considers your income and expenses. It can help you take control of your money and ensure that you spend it wisely. With the envelope budget, for example, you can physically dedicate set amounts of cash into envelopes for spending categories like gas and groceries. An envelope budget can prevent overspending and help you save extra money each month for your emergency fund.

Another option is the zero-sum budget, in which you choose a “job” for every dollar you earn. It can force you to put some money into your emergency fund savings, just like your other essential expenses.

Cut back on expenses

Chances are you’re spending more money than you need to. Look at your expenses and figure out how you can cut back. Maybe you don’t need the gym membership you rarely use, or you can prepare meals at home instead of dining out. Get creative and reduce or get rid of as many expenses as possible.

Pay down your debt

The more you spend on your car loan, student loan, or other debts, the less you’ll have to allocate toward your emergency fund. Focus on paying down your debt so you can save more cash for emergencies. If you’re struggling with debt, get a side job, sell items online, or get a 0% balance transfer credit card to help you out.

Use employer matches

To promote emergency savings, your employer may offer matching funds or payroll deductions. You can use these options to help you build your emergency fund. Find out if your employer offers any of these perks and take advantage of them if they do.

What to do if you don't have an emergency fund

If you don’t have an emergency fund to cover an immediate expense, don't worry. Advance America is here to help. We offer emergency loans such as payday loans and online loans that you can apply for from the comfort of your own home or stop by one of our 1200+ nationwide locations. Upon approval, you may be able to receive the funds on the spot in-store or have money deposited to your bank account as soon as 24 hours.

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