What is an emergency fund? Have you ever wondered how to start building an emergency fund? If your answer is yes, read on and find out how to build an emergency fund.
What is an emergency fund definition?
An emergency fund is a bank account with money set aside to cover the financial surprises life throws your way. You never know when you might have unexpected expenses such as medical bills, major car fixes, home-appliance repair or replacement, or the worst of all- unemployment.
The sooner you are prepared, the better it will be when unexpected things happen. An emergency fund will keep you afloat when you need it the most, and you will not need to rely on credit cards or take out high-interest loans.
How to start an emergency fund
Make a budget
Budgeting is crucial. You need to know where your money is going so you can find savings opportunities. Through budgeting, you will be able to see if you need to cut your expenses or boost your income.
Make your savings automatic
Try splitting a portion of your direct deposit into a savings account and make sure you maximize the interest you are earning by getting a competitive annual percentage yield (APY).
Increase the amount you are saving
If you want to give your emergency savings a boost, you should, gradually, start increasing the amount you are saving. If you take this step and you realize that you do not miss having the money in the checking account, then you have made the right choice.
If you receive a cash gift
If you receive cash as a gift from someone, it would be a great idea to put at least a portion of it to your savings account to boost the emergency fund. Also, a tax refund can be used for the same purpose. When you file your taxes, consider having your refund deposited directly into your emergency account.
Three to six months of emergency expenses
When you do the first step (budgeting), you will know how much money you need each month to cover essential expenses such as rent, mortgage, food, etc. Based on this, you will be able to determine your saving goal for at least three to six months in case an unexpected event happens.
When you reach your 6-month goal, do not stop saving. If an emergency happens, you will be happy to have extra cash on your hands.
How much should an emergency fund be?
The right amount for you depends on your financial circumstances. However, at first, you can make small goals and then work your way up to cover at least three to six months’ worth of essential expenses.
Developing an emergency fund may be a hard task for some people, and it may take some time, but it’s crucial to start, and eventually, you’ll get to the point where you’ll have enough money to live through a period without income.
Where should I put my emergency fund?
Your emergency account should be easy to access, but not that easy to make you tempted to make withdrawals every day.
Consider having your emergency funds in a few locations, such as a savings account, money market account, and short-term CDs.
A high-yield savings account is an excellent place for your money. The higher the APY, the more your savings account will earn.
Everyone needs to save for the unexpected because no one knows when that might happen. Having an emergency fund can mean the difference between successfully managing through a financial storm and going deep into debt. Contact Prudential Bank’s experts to discuss setting up an emergency fund and start managing your money better. Call at 215-755-1500.