Build Personal Financial Security
If you want to achieve financial security, consider an emergency fund your safety net. Generally, an emergency savings account is the first savings goal a family should have. While establishing an emergency fund can feel stressful or overwhelming, once you have an adequate amount tucked away in savings you will have peace of mind knowing your safety net is in place.
Why do you need an emergency fund?
An emergency fund is a savings cushion available to you in the case of a financial emergency. There are many situations where you may need to rely on your emergency fund, including job loss or other reduction of income, health emergencies, automobile repair, and home repairs. If any of these financial emergencies happen to you, an emergency fund can keep you from falling into debt.
Save three to six months’ worth of living expenses
To save for an emergency fund, you should know how much money you’ll need. Most financial experts recommend that you save about three to six months’ worth of living expenses. If you have a job that is less stable, are self-employed, or feel that you may need to use your emergency fund sooner rather than later, consider saving a larger amount. As your income grows, add to the account so that you always have six months of living expenses set aside.
Choose the right savings account
Emergency funds should be saved in a low-risk, short-term account. While it may be tempting to put these funds in a high-yield financial vehicle, keeping your funds in a low-risk account will ensure that your money is easy to access in a financial emergency. However, don’t keep the funds in your standard savings account or checking account. Not only will that make them too accessible, you’ll also earn a low interest rate. Money market funds are great for emergency funds because they are low risk and earn a higher yield than a regular savings account.
Make your emergency fund your top priority
Once you have a goal, it’s time to start saving. For many, saving for an emergency fund should be a top financial goal, even above retirement and college savings. Determine how much money you have to set aside each month, and if your money market account allows it, set up an automatic periodic investment monthly so that you won’t forget to transfer the money to your emergency fund.
Once you have your emergency fund established, don’t touch it except for true financial emergencies. Remember that this money isn’t for vacations, large purchases, or other “wants". If you do need to use the emergency fund, start a new savings plan to replenish it as soon as your get back on your feet.