The Importance of Having an Emergency Fund
February 28, 2021
February 28, 2021
If you were suddenly faced with an unexpected $1,000 bill for a car repair, leaking roof or medical procedure, would you be able to easily cover it with cash? According to a recent survey, fewer than 40% of Americans said they would have the resources readily available.
If there is one thing we learned over the last year, it is that life is unpredictable—many have lost their jobs or had their hours cut, and even those who are still employed have realized how quickly things can change. This has led many people to look at their financial wellness more closely, and having an emergency fund is an important step for financial health.
What is an emergency fund?
An emergency fund differs from your other savings accounts, such as retirement accounts or stock holdings, because it is a cushion that is readily accessible should a need arise. Of course, for many people this cushion is important when the loss of a job or income occurs. But it also can be used for more mundane expenses like a rock hitting your windshield or a cracked tooth.
Many people who do not have the funds readily available instead turn to their credit cards when they are faced with an unexpected bill. This can start a negative cycle of incurring interest charges if they cannot pay the total in full at the end of the month. The sum continues to grow far beyond the initial bill and eventually can even harm your credit.
Where should I keep my emergency fund?
The money for your emergency fund should be stored outside of your regular checking account, to remove the temptation of spending it on day-to-day bills, but somewhere you can easily access it, like a savings account. (Valley Strong offers NCUA-insured savings accounts where you can safely store your emergency fund.)
How can I start my emergency fund?
The prospect of putting aside money when you might already be living paycheck-to-paycheck can seem daunting, but you have to start somewhere. First take a look at your budget to see where you can make cuts that you might not even notice, such as that extra streaming subscription you added and no longer use.
Think in terms of saving just $25 a week—the amount of many people’s coffee habit—and at the end of the month you’ll already have $100. If you commit to saving that much, you’ll have a decent emergency fund available in less than a year, enough to put yourself in the shoes of those 60% of Americans who can readily cover an unexpected $1,000 expense. Slow and steady wins the race, and building momentum can do wonders for your self-confidence.
Another option is to jumpstart your account by putting in a bigger infusion from your next
bonus or tax refund. Or you could look into refinancing your mortgage to save money every month, which you can redirect to your fund. Even if you’re working to pay down credit card debt, you can still start to save at the same time to help avoid adding more debt with your next financial surprise. Even depositing a modest amount, is better than nothing if you vow to help it continue to build over time.
It might be wise to have your employer deposit a portion of your paycheck directly into your emergency fund as an easy way to make sure you do not spend it right away. Out of sight is truly out of mind when finances are concerned.
How big should your emergency fund be?
Any money is better than no money, so do not be discouraged if it takes a while to grow. While an emergency fund should be able to take care of an unexpected bill, such as for unforeseen medical expenses, your insurance deductible, or a home or car repair, ideally, you want to eventually save enough in your emergency fund to cover your day-to-day expenses for three to six months if you lost your job. The more you can save, the better; for example if you think replacing your main source of income will not take longer than six months, then strive to build your emergency fund even bigger. But again, remember that it can take a while to amass so don’t be discouraged.
Take the first step today
Ready to improve your financial health? It’s never too late to start a resolution, so take a look at our recent article on financial resolutions and contact a Valley Strong banker today to open that savings account for your emergency fund—or get answers to your other financial questions.