Emergency fund: what it is and why it is important

What is an emergency fund?

An emergency fund is a bank account with money set aside to pay for large and unforeseen expenses, such as:

  • Unexpected medical expenses.

  • Repair or replacement of household appliances.

Why do i need an emergency fund?

Emergency funds create a financial buffer that can keep you afloat in times of need without having to rely on credit cards or high interest loans. Having an emergency fund can be especially important if you are in debt, as it can help you avoid borrowing more.

“One of the first steps to getting out of debt is to find a way out of getting into more debt,” says NerdWallet columnist Liz Weston.

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How much should I save?

The short answer: If you’re starting out small, try to set aside at least $ 500, but work your way up to half a year of spending.

The long answer: Which amount is right for you depends on your financial situation, but a good rule of thumb is to have enough to cover three to six months of living expenses. (You might need more if you are self-employed or work seasonally, for example, or if your job would be difficult to replace.) If you lose your job, you could use the money to pay for necessities while you are away. find a new one, or the funds could top up your unemployment benefits. Start small, Weston said, but start.

Even having $ 500 saved can get you out of a lot of financial difficulties. Set something aside now and build your fund over time.

Where should I put my emergency fund?

A savings account with a high interest rate and easy access. Because an emergency can strike at any time, quick access is crucial. It should therefore not be linked to a long-term investment fund. But the account should be segregated from the bank account you use on a daily basis, so you are not tempted to dip into your reserves.

A high yield savings account is a good place for your money. It’s federally insured up to $ 250,000, so that’s for sure. The money earns interest, and you can quickly access your money when needed, whether through withdrawal or transfer of funds.

Axos Bank® High Yield Savings

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Varo savings account

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How to set up an emergency fund?

  1. Set a monthly savings goal. This will make you get into the habit of saving regularly and make the task less daunting. One way to do this is to automatically transfer funds to your savings account every time you get paid.

  2. Automatically move money to your savings account. If your employer offers direct deposit, there’s a good chance they’ll split your paycheck between multiple checking and savings accounts so that your monthly savings goal is met without touching your checking account.

  3. Keep the change. Use mobile technology to automatically save every time you make a purchase. There is savings-oriented apps link this with checking accounts or other expense accounts to round off purchase amounts on your transactions. The additional amount is automatically transferred to a savings account. If you usually spend cash, you can take your spare change, or maybe $ 1 and $ 5 bills after you’ve broken a $ 20, and put some in a jar at home. When the jar fills up, take it to the bank and deposit the money.

  4. Record your tax refund. You get a chance once a year – and only if you expect a refund. Saving it can be an easy way to increase your emergency reserve. When you file your income tax returns, consider having your refund deposited directly into your emergency account. Alternatively, you can adjust your W-4 tax form so that you have less money withheld. Then direct the extra money into your emergency fund.

  5. Evaluate and adjust contributions. Check in after a few months to see how much you’re saving and adjust if necessary, especially if you’ve recently withdrawn money from your emergency fund. On the other hand, if you’ve saved enough to cover six months of expenses and have extra cash, you may want to consider investing the extra funds instead.

When checking in, draw a line between emergencies and everything in between. In fact, once you’ve hit a reasonable threshold for emergency savings, Weston says, it’s a good idea to set up another savings account for irregular but unavoidable items, such as housekeeping. car, vacation and clothing. If you need help staying organized, many banks allow customers to create and label sub-accounts for different financial purposes.

Everyone should save for the unexpected. Having something in reserve can be the difference between weathering a short-term financial storm or going into deep debt.

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