Having an emergency fund can come in handy in helping ease the potential worries of a job layoff or paying for unexpected expenses. Not only will you have cash when needed, but you’re more likely to avoid dipping into your other savings, using a credit card, or incurring any additional debt by borrowing. It’s a great resource to have available when a sudden financial need sneaks up on you.
Most experts agree that having six months of living wages set aside in an emergency fund is a smart move. Think of it as a supplemental savings account that you only use “just in case.” Remember: you’ll need to be a little disciplined so you don’t withdraw from it in non-emergency situations.
Before you start setting up this fund, you should determine what it should be used for specifically. It’s not a general savings account. Your emergency fund is just that: it’s for unexpected emergencies only.
Health care expenses
No one can predict when a medical emergency will happen. If you have insurance, but you haven’t reached your deductible, you’re still going to be responsible for what could be a very large bill. Also, some dental insurance policies might only cover preventive costs. Crowns, root canals, and implants can be costly. In either case, it’s best to be prepared for any surprise health-related costs.
Job loss is something you may not see coming. If you have a severance package, great. Many individuals won’t when a job loss does happen. Having a balance of money in an emergency fund can help you get back on your feet while you look for new employment.
What happens when you owe more than you did last year? You may have prepared to pay a certain amount when you file, but any surprises can be covered by an emergency fund.
Home or car repairs
Owning a home or car has many benefits. With them comes an occasional nuisance. If your HVAC system suddenly goes on the fritz or you need a new transmission, it will cost you. Sudden, but necessary, repairs are hard to avoid.
Emergency fund benefits
Less dipping into other savings
With an emergency fund, your money is specifically allocated for emergency-only costs. Once you’ve established this fund, you don’t have to dip into your other savings. If you’re saving for college, vacation, retirement, etc., you can keep this fund separate.
Paying for any unexpected expense with a credit card can be challenging as that debt may linger. Of course there might be times that you need to. Hopefully, an emergency fund will help alleviate a need to use your plastic, take out a loan, or borrow from family and friends.
Peace of mind
Having a surplus of money for the unexpected can contribute to your financial well-being and – if nothing else – can alleviate any worries when it comes to the curve ball that unexpected financial costs may throw your way.
How to start
If you haven’t started an emergency fund yet, saving six months or more worth of living wages may seem daunting. It may take some time to get there, but you can start small.
While still saving for retirement, vacations, college, etc., also put a little aside every week towards the emergency fund. For example, allocate a certain percentage of your other savings to this new emergency fund. Automatic strategies may help – where your bank is splitting your paycheck into different accounts, including the one you set up as your emergency fund. You can also set aside your tax refund, work bonus, or another lump sum to get started or as a regular contribution.
Where do you keep an emergency fund, though? Remember, you’ll need quick access to this fund. It’s also best to have it separate from any other checking or savings account. You don’t want to accidentally, or be easily tempted, to withdraw from it. (Atlantic Union Bank has several savings account options that might be right for you).
It may take some time to get your emergency fund to its goal. Although we’ve mentioned that it should be six months of living wages, you can start small and take your time to get there. The most important thing is having a plan to tackle unexpected costs, and an emergency fund strategy is a good place to start.