Let's talk about how much emergency fund you need why it's so important. You never know when something might go wrong. Whether a surprise visit to the hospital, job loss, or a leaky bedroom window (this happened to me last year), it always pays to have some emergency savings on hand.
What Is An Emergency Fund?
An emergency fund is a safety net to protect you in case of unexpected events. It's money you save for an unexpected expense. It's money you have in a liquid account, such as an online savings account, so that you can access it when you need it.
I use a CIT Bank online savings account for my emergency fund because I can count on easy access to my money while also earning a competitive interest rate to earn more money on my existing balance.
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Should you lose your job, an emergency fund can cover your living expenses while you find a new one. If you have a financial hardship, an emergency fund will cushion your fall, preventing you from sinking into debt.
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Your emergency fund should cover the essentials, in the case of an inability to work, or loss of your job. That is, for paying required living expenses such as rent/mortgage, food, bills, and so on.
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In these situations, cutting back on discretionary spending, such as going out to eat or hobby/entertainment-related expenses, is wise.
Why Do I Need An Emergency Fund?
It's impossible to tell when a financial hardship will occur. Whether it be a medical emergency or a loss of employment, it's incredibly important to have money set aside.
If you were to lose your job, for example, ask yourself what would you do to continue paying your bills while you sought new employment? Would you use a credit card and dive deep into debt? Without an emergency fund, you might have to, and that will lead you into grave trouble if you don't find a job soon.
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It's scary, really! In 2012, my wife and I both lost our jobs 2 weeks apart. We went from making a combined 6-digit income to practically nothing in under a month. We never thought about how large our emergency fund should be, but we were lucky that we had six months of living expenses saved up.
The bottom line is, in the case of a financial hardship, you need to have money put aside so that you don't fall into debt. This is why I recommend opening a CIT Bank online savings account for your emergency fund.
How Much Should You Keep In Your Emergency Fund
If you're wondering how much you should have for your emergency fund use this as a rule of thumb.
If you have one income, it's recommended that you have six months of worth of expenses saved up. If you have multiple sources of income, such as multiple jobs, passive income, or your spouse has steady income as well, then having as little as three months of living expenses saved up can still be considered safe.
When calculating your expenses, tally up things that you cannot easily reduce or eliminate in the case of an emergency. These expenses include your rent or mortgage, groceries, electricity, internet, utility bills, and any insurance premiums you might have, such as auto or health insurance.
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After you've tallied up your expenses, multiply by six (or three if you have multiple sources of income), and that's a rough estimate of how much money you should have in a safe place, such as in a high-yield savings account.
What Is A Good Emergency Fund Amount?
Do you have enough saved in your emergency fund? Even if you can't save the recommended three to six months of living expenses, it's important to have at least $1,000 in the bank. I recommend using an online bank in a savings account or a money market account.
Many common emergencies can be covered for less than $1,000 and this prevents you from having to rack up a credit card balance that you may not be able to cover.
There are two ways to save up the first $1,000 if money is already tight. The first way, which is a slower approach, is to save $5 a day, every day until you have $1,000.
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The second way is to get a side hustle. With a side hustle you can easily save $1,000 over a faster period of time, or at the very least, combine this with saving $5 a day to get to your goal quicker.
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Either way, having $1,000 in a high-yield savings account at all times will cushion any financial hardship that comes your way.
How To Start Building An Emergency Fund
After you've opened an account for your emergency fund, you'll want to put spare money in as often as possible, or at least once a month. The best thing you can do is to cut back on your discretionary spending and make a savings goal. Do this by creating a budget.
Two ways you can do this is by going out to eat less often or put a halt on your shopping (get off Amazon for a bit). Then, take the money you would have spent and then deposit it into your emergency fund.
Another thing you can do is to lower your monthly living expenses by negotiating your bills with your service providers.
If you can't cut back expenses any further, you can use your latest tax refund or a stimulus check to fund your emergency fund, as an example. My friend once drove for DoorDash to raise money for her emergency fund. If getting out isn't your thing, there are many brilliant ways you can make money online to get your emergency fund started.
Where To Save Your Emergency Fund?
One of the best places where you can park an emergency fund is in a high-yield savings account. I personally use a CIT Bank savings builder account. This is because you'll earn interest on your money while also keeping it in a safe place. These accounts are FDIC-insured up to $250,000 and are accessible for when you need it.
While you may be tempted to put your emergency fund in a checking account, it is often better to place your emergency fund in a totally separate place, such as your savings account.
Why? Because it's too easy to write a check. Your emergency fund must be in a safe place, free from temptation. Don't use cash. Don't use a checking account. Lock it away in a savings account.
You want to avoid parking money in a certificate of deposit because your money will be inaccessible should you need it. You may also ask, “Should I invest my emergency fund?” and the answer is No, and here's why.
While investing your emergency fund may bring you greater gains, the market might work against you and you may lose money in the short term just when an emergency strikes like the need for sudden home repair.
Your emergency fund is a type of insurance. It doesn't make you money – in fact, it can lose relative value over time due to inflation, but that's okay because you need the money on hand for when that $5,000 medical emergency strikes.
That's why I push for you to keep your rainy day fund in an online savings account.
What To Do After You Have Enough In Your Emergency Fund
After saving up for an emergency, you may have additional money coming in. If you haven't already paid off any credit card debt you might have, this would be the time to do that. By not having excess monthly credit card payments (e.g., from interest), you're actually saving additional money each month.
After you're clear of credit card and other high interest debt, consider opening an IRA.
I use Charles Schwab Bank for my Roth IRA. If you open up a Schwab account through this link, you can get up to $500 based on how much you deposit. In 2020, you can put up to $6,000 ($7,000 if you're 50 or older) into one. Your money will grow faster, and it's an excellent way to save for retirement or other qualified expenses such as a first-time home purchase.
Wrapping It Up
When it comes to wondering how much to put in an emergency fund, the bottom line is you need an absolute minimum of $1,000 and recommended three to six months of living expenses. Without this, you risk falling into debt, or worse, should you encounter a financial hardship, loss of employment, or unexpected expense.
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