Your Emergency Fund is More Than a Safety Net

emergency fund

When most people think about an “emergency fund,” they equate it to money put aside for financial emergencies or unexpected expenses. While this might be the primary purpose, these funds hold much greater value in your overall financial health. Being unprepared for financial hiccups, such as a sudden job loss, unplanned medical bills, or other surprise costs, can domino into additional challenges. A well-intentioned and planned emergency fund equips you to handle setbacks better and steer clear of costly alternatives, such as payday loans. In this article, we’ll outline why an emergency fund is so critical to your overall financial well-being and provide tips on how to begin or boost your saving efforts.

Why Do I Need an Emergency Fund?

Everyone will experience a financial curveball from time to time – that’s part of life. How you respond to these challenges will determine whether the event is more of an inconvenience or a serious setback.

With an emergency fund, you’re better equipped to handle the unexpected and remain in control of your finances. Here are some key reasons why your emergency fund should rank among your top financial goals:

  • Protects Against Significant Financial Setbacks:

Life can be incredibly unpredictable. We’ve all had moments where an unexpected expense arises and derails our financial plan. Whether it’s a sudden job loss, reduced work hours, urgent home repairs, medical emergency, vet bill, or other unforeseen costs, an emergency fund can help keep you covered.

Emergency funds act as a financial buffer that provide you with the extra money to manage unanticipated expenses. Having these funds stashed away somewhere safe allows you to cover costs with minimal setbacks.

  • Reduces Financial Strain:

The peace of mind that comes from knowing you have money stowed away for emergencies can significantly lower your financial stress and the strain it puts on your wallet. When a crisis creeps up, you can alleviate the anxiety of determining how you’ll scrape together enough money to cover unexpected expenses. This reassurance allows you to focus on seeing a solution rather than worrying about where you’ll find the extra funds.

  • Helps You Avoid Costly Debt:

If you do not have money set aside and a financial curveball comes your way, you’ll likely have to seek costly alternatives, such as high-interest credit cards or payday loans. Accumulating new debt to cover unforeseen expenses can create even more long-term financial challenges. With an emergency fund, you’re able to face the setback head-on while avoiding costly new debt.

  • Guides You Toward Financial Security:

Your emergency fund isn’t only about addressing your immediate financial needs. When you have money set aside, you gain the security and confidence needed to pursue larger financial goals, such as investing in a home or building your retirement plan.

Without the security granted by an emergency fund, it can be difficult to plan for your future if you’re always looking over your shoulder for the next curveball.

How Can I Build My Emergency Fund?

It can feel intimidating to start building your emergency fund, especially if you’ve never had one. However, the process is much easier than you might believe. Use the following tips to begin building your financial safety net:

  • Open a Designated Account:

It’s highly recommended that your emergency fund be separate from your other savings and spending accounts. This tactic ensures the money you set aside is there when you need it and helps to avoid the temptation of spending it frivolously.

  • Start Small & Grow:

It’s okay to start small! Rome wasn’t built in a day, nor will your emergency fund be. As you become comfortable with putting money aside, work to increase the amount slowly so that it doesn’t overwhelm your monthly budget.

  • Form a Habit & Stick to It:

The key to saving money in the long term is to turn the process into a habit. Good habits are just as hard to break as bad ones. Once you’re accustomed to putting money aside monthly or from each paycheck, you won’t want to stop. It might be challenging at first but stick with it.

  • Build Your Motivation & Confidence:

Once you begin contributing to your emergency fund regularly, you’ll be surprised how quickly it will grow. After a few months, look back to see how far you’ve come. Even small deposits can add up. Seeing progress in your finances gives you that boost in confidence and motivation to keep going. Just like if you’ve ever worked to lose weight, once the pounds start coming off and you see a slimmer you in the mirror, your motivation level skyrockets.

  • Automate Your Savings:

The best way to grow your emergency fund is to automate the process. Out of sight, out of mind – you’ll be less likely to frivolously spend money you could be putting aside with automation tools like Payroll Deduction and Automatic Transfers.

  • Payroll Deduction automatically transfers a set amount from each paycheck into your emergency fund, providing a completely hands-off approach to saving.
  • Automatic Transfers function like payroll deduction; however, you choose the date the transfer takes place. It could be the first of the month, a specific day, etc. – you’re in control.
How Much Should I Keep in My Emergency Fund?

Everyone’s financial situation is different and deserves a personalized approach. A good rule of thumb is to set aside enough money to cover 3-6 months’ worth of living expenses when building your emergency fund.

Suppose you’re unable to stash that much away just yet, there’s no need to worry. The most important thing is to begin saving. Even if you can only make small contributions to start off with, that’s better than nothing! Save whatever you can afford at first, then work to increase your contributions once your finances improve and your budget has a little more breathing room.

Where Should I Keep My Emergency Fund?

It’s always wise to keep your emergency fund in a separate account. This tactic helps you avoid accidentally spending the money or being tempted to spend it frivolously. However, you want to be able to access the funds quickly in emergencies.

The two best accounts are a Savings Account and a Money Market Account.

  • Savings Account:

When you’re just starting to build your emergency fund, open a regular savings account. These accounts typically have little to no minimum balance requirements or fees. Link the account to your everyday checking account through digital banking. That way, if you ever need to transfer funds to yourself in an emergency, you can do it instantly.

  • Money Market Account:

Once your emergency fund is growing, turn to a money market account. These accounts offer higher yields, helping your money to grow quicker. Additionally, the saving rates are usually tiered – meaning, the more your balance grows, the more you’ll earn.

Money Market Accounts typically have a minimum balance, such as $1,000, to earn dividends or interest. These accounts are ideal for your emergency fund because you earn more on your money, but you can still access the funds instantly in an emergency. Simply transfer the funds to your checking when needed.

It’s important to note that you are limited to how many transfers you can make a month – usually no more than six. However, that shouldn’t be a problem because you’ll only be taking money out in emergencies, which are hopefully rare!

We’re Here to Help!

Building and maintaining an emergency fund is crucial to your overall financial well-being. Not only does it help you face financial curveballs head-on, but you can have peace of mind knowing that unexpected expenses won’t derail your finances and goals.

If you want to learn more about opening a savings or money market account for your emergency fund, we’re ready to help. Please stop by any of our convenient branch locations or call 888-777-9982 to speak with a team member today.

Disclosures

  • NCUA

    This credit union is federally insured by the National Credit Union Administration.

  • Equal House Lender

    Equal Housing Lender

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