Emergency Fund 101: How to Start and Grow Your Savings
“Emergency fund” might be a big buzzword among popular financial media personalities and advisors, but it’s for good reason. It’s one way that people are able to keep growing their wealth without being derailed by costly situations.
Whether you have already started to build your emergency fund or you don’t have one and want to know more about it, this guide will answer all of your questions. Contact our New York City financial advisors when you’re ready to get started.
What is an emergency fund?
An emergency fund is an amount of money set aside to prepare for unforeseen expenses. These costs could be expensive, and without an emergency fund, you might have to take out high-interest loans or credit cards.
Is an emergency fund the same as a savings account?
A lot of people use these two terms interchangeably, but they are not the same thing. It’s easier to make frequent withdrawals from a savings account. You should keep your emergency fund untouched until you need it for dire circumstances.
If you treat an emergency fund like a normal savings account, you might struggle to save enough money to cover large expenses when they come up.
How much money should be in an emergency fund?
Is a $1,000 emergency fund enough? What about a $5,000 emergency fund? The “answer” will change depending on the website you’re reading.
In reality, a set dollar amount isn’t as important as your personal situation. Instead of aiming for a strict, specific amount, you should save enough to cover 3-6 months of expenses. That amount will and should look different for everyone.
This is because an emergency fund should be there to pay for expenses in the event that you lose your income. You should have enough in the fund to carry you through until you find another job.
It’s also a good idea to look at your largest possible expenses. How much would it cost to replace your car (even with insurance)? What if you face piles of medical bills?
All of these things come with dollar amounts and should give you an idea of how much you should save up.
Where to Keep an Emergency Fund
There are four secure places to store and save your emergency fund. They are all valid options with their own benefits.
The most important thing to remember is to keep it somewhere you can withdraw the money without penalties. Since this money is for emergencies, you will need to be able to access it when those emergencies strike.
High-Yield Savings Account
Since savings accounts give you easy access to your money, they are the most popular place to keep an emergency fund.
When you are looking for a savings account, choose one that offers the highest interest rate and no monthly fees.
It might be a good idea to keep this savings account at a separate bank so that it is more difficult to withdraw money. Look for banks that are offering a welcome bonus to new customers, too.
Money Market Accounts
A money market account* is a way to invest your emergency fund until you are ready to use it. They might offer higher yields than savings accounts.
Plus, you can withdraw money from these accounts at any time without penalties.
Certificates of Deposit (CDs)
A certificate of deposit is only a good idea if you feel fairly certain that you won’t need to take out money within the required window. Most CDs don’t let you withdraw funds for the first 24 months.
The good thing about them is that they have a really high interest rate and can help your emergency fund grow without any extra effort.
When to Use an Emergency Fund
The keyword to remember is “emergency.” You should only use money in this account for things you absolutely cannot live without.
This fund is set up to cover unforeseen expenses that you might otherwise have to pay for with loans or credit card debt.
Some examples of things that qualify as emergency expenses include:
- New tires for the car
- New roof
- Pay bills after you lost a job
- Medical bills
- Home or car repairs not covered by insurance
How to Help Your Emergency Fund Grow
The most important thing is to just start saving. Whether that means cutting out a few extra expenses or rearranging how you save money, the first step is often the hardest but the most rewarding.
Start Small
No matter what your financial situation is, you have to start somewhere. Even if you are just setting aside $50 each paycheck, it’s a start.
Some banks even have the option for you to round up all payments to the nearest dollar and they automatically put the change into a savings account.
As you continue to add to your emergency fund, gradually increase how much you contribute.
Save Your Tax Refund
If you don’t need any money from your tax refund to pay for living expenses, put it all into your emergency fund. Treat it like extra income. Whenever you receive financial gifts or bonuses, put as much as you can back into your emergency fund.
Make a Budget
The best way to create an emergency fund is to build it into your budget.
Look at how much you are spending each month. If there is a way for you to cut back a bit until you meet your savings goal, do it.
With a budget, you will have control of your money and how you spend it. You’ll know how to afford saving money and how to reach your goal.
Set Up Direct Deposit
Some people call this paying yourself first. Basically, when you automatically deposit money into your emergency fund, you don’t have time to spend it first. It’s already there.
This essentially forces you to contribute to your emergency fund and live on the rest of your income.
Contact a Financial Advisor
When you are ready to start creating your emergency fund, reach out to a New York City financial advisor. We’ll look at your income and expenses and help you make this savings account grow larger, faster so that you are prepared for any emergency that comes your way.
Ready to begin? Power Forward Group is here to answer questions and help you meet financial goals.
*Money market funds seek to preserve the value of your investment at $1.00 per share, however there is no guarantee it will do so, and you may lose money. Past performance is not a reliable indicator of future results.
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