We all experience unexpected financial emergencies—car repairs, unexpected medical bills, broken appliances, loss of income, or even damaged cell phones. Large or small, these unplanned expenses often feel like they hit at the worst times.
Setting up an emergency fund is one important way to protect yourself. By putting money aside for these unplanned expenses, you are able to recover quicker and get back on track towards reaching your larger savings goals.
What is an emergency fund?
An emergency fund is a money that’s specifically set aside for unplanned expenses or financial emergencies. Some common examples include car repairs, home repairs, medical bills, or a loss of income.
Why do I need it?
Without savings, a financial shock—even minor—could set you back, and if it turns into debt, it can potentially have a lasting impact.
How much do I need in it?
The amount you need to have in an emergency savings fund depends on your situation. Think about the most common kind of unexpected expenses you’ve had in the past and how much they cost. This may help you set a goal for how much you want to have set aside.
How do I build it?
There are different strategies to get your savings started. These strategies cover a range of situations.
- Create a savings habit. Building a savings of any size is easier when you’re able to consistently put money away. It’s one of the fastest ways to see it grow.
- Manage your cash flow. Your cash flow is the timing of when your money is coming in (your income) and going out (your expenses and spending). If the timing is off, you can find yourself running short at the end of the week or month, but if you’re actively tracking it, you’ll start to see opportunities to adjust your spending and savings.
- Take advantage of one-time opportunities to save. For many Americans, a tax refund can be one of the largest checks they receive all year. Save $500 (or whatever you can manage) from your tax refund and add to it each month until you reach your goal.
- Make your saving automatic. One common way to do this is to set up recurring transfers through your bank or credit union so money is moved automatically from your checking account to your savings account. You get to decide how much and how often, but once you have it set up, you’ll be making consistent contributions to your savings.
- Save through work. If you receive your paycheck through direct deposit, check with your employer to see if it’s possible to divide it between two accounts. If you’re tempted to spend your paycheck when you get it, this is an easy way to put money aside without having to think twice.
For more information read the full article from the Consumer Financial Protection Bureau (CFPB).