The world is unpredictable, but you can prepare for the unexpected with an emergency fund. Having an emergency fund can set you up for financial success by helping you cover home and auto repairs, medical expenses, and more.
Here is what you need to know to create an emergency fund to protect you and your loved ones no matter what life throws at you.
What is an Emergency Fund?
An emergency fund is money saved up to cover costs of unanticipated events that your budget may otherwise be unprepared for, like a job loss, illness or injury, home repair, car repair, and more.
If you have an emergency fund, it is less likely that you will have to use credit cards or personal loans in periods of financial pressure. Credit cards and loans must be paid back with interest, which costs you more in the long run.
In the event of a financial challenge, relying on credit means that you must pay more to resolve the situation, making the experience even more of a headache. For example, if a massive storm damages your garage, and you have a sizeable emergency fund, you can make repairs and move on.
Without an emergency fund, you would likely have to put repairs on a credit card or take out a loan if your budget cannot afford the expenses. This means, on top of the repair costs, you would need to pay interest.
How Much Should I Have in My Emergency Fund?
How much you have in your emergency fund depends on your needs and how much you can realistically save based on your budget.
A good rule of thumb to work toward is having an emergency fund that covers your cost of living for three to six months. An emergency fund of this size can help you stay afloat in times of financial pressure.
For example, if the company you work for shuts down and you must find a new job, your emergency fund could give you the stability and time to find a new position by helping you cover living expenses without the use of credit.
However, when just beginning to save for an emergency fund, it is important to start with an attainable goal. For example, you can work to save $100. Once you have done that, make $300 your goal. If you save regularly, your emergency fund will grow faster than you think.
How Do I Make an Emergency Fund?
First, review your budget. Look at how much you can save per paycheck.
Then, decide what unnecessary expenses—such as shopping, dining out, and leisure activities—you can cut back on. You don’t have to stop extra spending entirely, but, if you save some of every paycheck, your emergency fund will add up over time.
For example, if you have a streaming service that you don’t use very much, you could cancel the subscription and add that savings to your emergency fund. Even an extra $10 a month will make your emergency fund grow more than you expect.
Next, think about ways to make extra money. Do you have items you have been meaning to sell? Do you have an upcoming tax refund that you can save?
Finally, add up how much you can put into an emergency fund on a regular basis and stick to that promise.
Online budgeting tools can help you stay on track with your savings. With Credit Union 1 Digital Banking, you can create a personal dashboard to monitor your spending, set up automatic transfers to your savings account, and budget effectively to quickly build up an emergency fund.
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