Do You Have an Emergency Fund?
An emergency fund is a pool of money that you save and only dip into in order to cover unexpected financial expenses. You don’t use the money in this fund to pay your cable bill or cover your mortgage payment. Instead, you use it to pay for unplanned car repairs or a new refrigerator if yours dies unexpectedly.
As the name suggests, this fund is to be used only for emergencies.
Why you need an emergency fund
Think of an emergency fund as a financial safety net. Without one, you might have to resort to putting expensive repairs or purchases on your credit cards. That’s a bad financial move because credit cards come with such high interest rates.
It’s not unusual for credit cards to charge interest rates of 24% or higher. Say your furnace stops working. Without an emergency fund, you might have to put the thousands of dollars a new furnace will cost you on your credit card. If you can’t pay off this debt in full on or before your card’s due date, you might be forced to pay 24% or more in interest on what you owe, something that can make your debt grow quickly.
If you’ve built an emergency fund, though, you can use the cash in it to pay for your new furnace. Then you won’t face any high interest charges, saving yourself hundreds of dollars.
How much money should you have in an emergency fund?
Most financial experts recommend that you save from three to six months of living expenses in your emergency fund. That way, you can cover your living expenses if you suddenly lose your job or your income is unexpectedly reduced.
This is just a rule of thumb, though. You might decide to save more if you have a family that you are supporting. If you are living alone, you might instead find that an emergency fund with three months of living expenses is sufficient.
Where should you deposit your emergency fund?
You should deposit your emergency fund money in a savings account. The goal is not for this money to earn interest, though if it does, that’s a good thing. But you do want to deposit your funds in a safe account, one in which there is no risk of losing your money.
You also want easy access to this cash. That’s why depositing your emergency fund money in a savings account makes sense: You can make withdrawals whenever you need to, quickly and easily.
