By: Ellen Poels
What is it and Why it is Important?
An emergency fund is a cash reserve that is set aside for unplanned expenses or financial emergencies. Emergency savings can be used for large or small unplanned bills or payments that are not part of your routine. Setting up an emergency fund helps you to handle an unexpected expense without getting into debt and avoiding high-cost loans.
Common Examples
Car repairs
Home repairs
Medical Bills
Loss of income
When to Establish an Emergency Fund?
You should start to build up your emergency fund once you get a job. In your emergency fund, you should have enough money to cover at least 3 to 6 months’ worth of living expenses. Start by estimating your costs for critical expenses. One way to help you separate your monthly expenses is either by creating a spreadsheet or using this layout It Make$ Cent’s! provides on its website. Individuals should keep their emergency funds in accounts that are easily accessible and easily liquidated.
What does Liquidation Mean?
The ease with which an asset, or security, can be converted into ready cash without affecting its market price.
What is the 50-30-20 rule?
The idea is to divide your income into three categories:
Spending 50% on needs
Spending 30% on wants
Spending 20% on savings
Six Easy Steps to Creating an Emergency Fund.
1. Consider using a basic savings or money market account. Ideally, it can be linked to your checking account. You want the money accessible in a day, but not in an instant. You want this money to stay safe and liquid. It should not be invested in stocks or even bonds.
2. Look for an account that pays you back. Some savings vehicles offer a small annual yield. It’s important to note that some of those may have minimum deposit or balance requirements. Shop around. Make sure there are no annual fees.
3. Save enough to cover three to six months of expenses. The amount you need in the account for your emergency fund will vary depending on whether you have several dependents (you need more) a spouse with a job (you may need less), or wealthy parents you can ask for help (again, you’d need less). If you have one income, are self-employed, and have a family to support, you may want up to eight months in an emergency fund (and don’t neglect health and disability insurance).
4. Start small. If you don’t have that kind of cash on hand, set up an automatic transfer of, let’s say $100 a month, into the account until you reach your target.
5. Only tap the account for true emergencies. This could include your car breaking down, losing your job, the roof starting to leak, or a large medical bill.
6. Replenish the account if you draw on the funds. Unplanned expenses aren’t one-and-done. They may even come in threes
For more info, visit:https://www.nerdwallet.com/article/banking/savings/emergency-fund-why-it-matters