Building an Emergency Fund
What is an emergency fund?
An emergency fund is a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies. Some common examples include car repairs, home repairs, medical bills, or a loss of income.
In general, emergency savings can be used for large or small unplanned bills or payments that are not part of your routine monthly expenses and spending.
Why do I need it?
Without savings, a financial shock—even minor—could set you back, and if it turns into debt, it can potentially have a lasting impact.
Research suggests that individuals who struggle to recover from a financial shock have less savings to help protect against a future emergency. They may rely on credit cards or loans, which can lead to debt that’s generally harder to pay off. They may also pull from other savings, like retirement funds, to cover these costs.
How much do I need in it?
The amount you need to have in an emergency savings fund depends on your situation. Think about the most common kind of unexpected expenses you’ve had in the past and how they cost. This may help you set a goal for how much you want to have set aside.
If you’re living paycheck to paycheck or don’t get paid the same amount each week or month, putting any money aside can feel difficult. But, even a small amount can provide some financial security.
Keep reading to find the savings strategy, or strategies, that work best for you.