The “Oops” Account.
A “Rainy Day” Fund.
The “$h-t Hit the Fan” Account.
However you refer to it, having an emergency fund is critical to anyone's long-term financial well-being. In a pinch, an emergency fund is a safety net that can help you avoid taking on unnecessary debt, help you weather a financial crisis, and assist you with getting back on your feet after a myriad of unexpected curve balls are thrown your way.
But How Much Do You Really Need?
For many, the answer to this question is found via the recommendations of people who are deemed to be financial “experts.” However, contrary to what you may think, a quick survey of that expert financial advice may not give you a concrete solution. In fact, it may very well confuse you to the point of giving up your quest to fund an “EF” adequately. After all, when you're faced with multiple options, it's sometimes difficult to make a definitive choice….
“Save six months of expenses”
“Save one year of expenses based on your bare-bones budget”
“Save $1,000 in a baby EF”
These options are all examples of expert advice that is shared daily. With all of the options out there, how are you supposed to decide which method to adhere to?
The key to navigating the waters of emergency fund information successfully is to remember that setting up, funding, and utilizing an EF is a personal decision. No matter what any expert touts as the best method for establishing an emergency fund, you need to tailor your approach to your own personal situation.
So whether it's that you save one month, six months, or twelve months of expenses, the point is that you're saving something. This is especially true if you're just starting out on your own:
Save something; anything.
How To Build It
As you begin to build your emergency fund by saving anything you can, the following tips are worth remembering:
- Fund the account regularly. One of the most critical components of an emergency fund is the actual funding of the account. It needs to be automatic, as in something that you'll do each and every week, month, or year. If you're struggling to pay your bills or meet your obligations now, just think of how beneficial a bit of breathing room could be. Even if it's only $25/month, something is always better than nothing in this case. Look for the best online checking accounts to get an account with good rates and fees.
- Over-estimate what you think you'll need. One caveat to funding EFs is that people often miscalculate just how much they'll need. If you're going to base your account balance on a certain amount of monthly expenses, you should build in a bit of a buffer to help you navigate the inevitable visits you'll receive from Murphy.
- Utilize separate accounts. An emergency fund should not be held in the same day-to-day checking account you use daily. It also shouldn't be lumped in with long-term goal savings such as a house down-payment fund or future college tuition funds for your children.
- Tailor your approach to your specific situation. Once you've found a plan that sounds best for you, don't forget to ensure it's suited for your particular needs. Base your projections upon factors such as how many income streams you/your family has, medical needs, childcare costs, etc.
- Remember that EFs are fluid. Above all, remember that much like life's circumstances, your emergency fund's balance may always be changing. You might be required to spend some of its funds, but you should also work to replace said funds once you've recovered from whatever setback or challenge necessitated the use of the money. By treating your EF as a fluid entity, you're one step closer to maintaining financial freedom.
Where Do You Put It?
Once you've built it, you should keep your emergency fund in a high yield savings account or money market account to work for you. You could also consider looking at CD accounts, but that does tie your money up a bit.
Check out this list of the best bank accounts:
What is your benchmark for how much you keep in your emergency fund?