How much money do you have socked away for an emergency? If you’re like most millennials (61%), you probably have less than $500. Let’s be real: Between student loan debt, medical bills, and high rent payments, an emergency fund is way down on your list of priorities. But it shouldn’t be. Here’s why:
What is an Emergency Fund?
An emergency fund is a separate bank account used to stash away money for unexpected expenses, like:
- Job loss
- Car repairs
- Medical bills
- Home repairs
Emergency funds are kept separate from regular savings and checking accounts. They’re used strictly for emergencies. If your hot water heater dies or you get laid off from your job, you have the cash to cover these unexpected expenses.
Where Should I Keep My Emergency Savings?
Emergency funds should be liquid, so they can be accessed quickly. Dave Ramsey recommends stashing your emergency cash in:
- A simple checking account, or
- A money market account with check-writing and debit card capabilities
Your emergency cash should be easy to access, but not too easy. You don’t want to be tempted to dip into your savings. Try keeping your fund at a separate bank from your regular checking account.
Why Do I Need One?
Emergencies never strike at a good time, and if it’s an expensive one, you may not have the cash on hand to cover the cost. If you don’t have the cash, you may be forced to use a credit card, take out a personal loan, or put the problem on the back burner until you have the money to pay for it. None of these scenarios is ideal.
Consider the average cost of some of the most common and expensive emergencies:
- Water heater replacement: $933
- Emergency room visit: $1,389
- Job loss: 6 months’ salary
- New brakes on a car: $500
If anyone of these problems were to pop up tomorrow, would you have the money to cover these costs without hurting your financial health? If you had an emergency fund, you wouldn’t think twice about it.At the end of the day, having emergency cash can mean the difference between a minor inconvenience and financial ruin.
How to Start Building an Emergency Fund?
Before you look for ways to sock away money, first set a goal for how much you want to save. Financial experts recommend having sixth months’ worth of expenses or salary saved up. Keep in mind that six months’ salary is your long-term goal, not necessarily your immediate one. Here’s how you can build up your emergency fund:
- Start small. If you pay for something in cash, stash away the change – even if it’s just quarters and dimes – in a jar. When the jar is full, move that money into your savings account.
- Set a monthly goal. Calculate your income and expenses to see how much money you have leftover each month. Make it your goal to put away a certain amount of that leftover cash into your emergency fund each month.
- Stash away your tax refund. If you receive a substantial refund, it may be enough to make up the bulk of your emergency fund. Consider having your refund auto-deposited into your emergency fund account.
- Cut back expenses. Take a hard look at your expenses, and cut things you don’t really need.
If you have an emergency fund, you never have to stress about unexpected costs or even losing your job. Start small and build up your fund over time.