Creating an Emergency Fund for Unexpected Expenses
A recent national survey found 59% of the Americans surveyed wouldn’t have the cash to pay for an unexpected $1,000 expense, such as a car repair or medical bill. Of the survey’s participants,
5% would take out a personal loan
16% would borrow from family or friends
25% would charge to a credit card and pay over time
13% would pay it but cut spending on other expenses (food/gas/etc.)
41% would pull from savings
Why is an emergency fund necessary?
An emergency fund prevents disruption to your personal long-term financial goals by avoiding using your personal savings account, which should be primarily used for long-term financial planning goals, like retirement.
An emergency fund also prevents you from accumulating additional debt from interest rates. According to the survey, 25% of the respondents surveyed would assume credit card debt. However, the average interest rate on credit cards is above 20%. As a result, changes can add hundreds of dollars to the emergency expense.
How much should you save in your emergency savings account?
Ideally, you will want to have 3-6 months of expenses tucked away in your emergency savings. However, this goal can seem unachievable if you are looking at the total amount. Instead, start with a smaller goal. With nearly 60% of American’s unable to afford an unexpected $1,000 expense, establishing this monetary goal is a reasonable and achievable first step.
Where should you keep your emergency funds?
Emergency funds are best placed in an interest-earning bank account, such as a money market or interest-earning savings account, that can be accessed easily without taxes or penalties.
Try to avoid tying up your money in any long-term investment funds. You will want to have quick access to your money in the event of an emergency, and long-term investment funds make it more difficult to access your money quickly.
How do you build an emergency fund?
Establish a budget.
Reach out to us to help! We can help you learn strategies, tips, and tools to help achieve your financial goals.
Track your spending.
Together Credit Union offers Money Management, a budgeting tool accessible through our mobile banking app and online banking platform.
Pay yourself first!
This is a budget strategy focused on achieving your savings goals by utilizing a modified Spend, Save, and Share financial model. This model allocates 50% for necessities and/or expenses, 30% for debt repayments or wants, and 20% for savings.
Have a Plan for Bonus Money.
Use the “pay yourself first” modified spend, save, and share financial model to allocate tax refunds and stimulus checks to cash influxes from holidays, birthdays, or work bonuses wisely.
