Most of us know that an emergency fund is essential for financial safety and well-being. But it can be daunting to start one — which type of account should you open, how much money should you set aside, and when is the best time to get started? If you – like so many others out there – struggle to get your head around all of these things, never fear. Here's a short video breaking down emergency funds, why it's important to have one, where and how to save, and other savvy tips on how best to manage it.
Video Transcript:
We've all been there. A problem suddenly comes up and you need some quick cash. Whether it's a leaky roof, car repairs, or a change in job status, life is full of surprises. Having an emergency fund to pay for unexpected expenses can help you breathe easier during stressful times. So how much money should be in your emergency fund?
A good rule of thumb is to set aside enough cash to cover three to six months of essential living expenses. Things like rent, car payments, childcare, and household bills. Three to six months of expenses may seem like a lot, but saving is easier when you put away a little at a time. For example, if you direct deposit just $25 a week into your account for a year, you'd save $1,300.
If you want to accelerate the process, try setting aside larger amounts from your tax refund or a company bonus, or you could skip your daily latte for a month or two and instead direct those dollars to your emergency fund. It all adds up. Choosing the right type of account for your emergency fund is also important.
You want to have easy access to the funds, but not so easy that you're tempted to make the occasional withdrawal for non-emergencies. To fight that urge, forego getting an atm card for the account or keep the card at home instead of in your wallet or purse. A money market account may offer a higher interest rate than a regular savings account, helping you grow your balance.
Finally, if you do have to dip into your emergency fund to cover an expense, always replenish it as quickly as you can. You never know when lightning will strike, but when it does, you'll be prepared.
