As the new year settles in, this is a great time to think about the future and unexpected expenses. Having funds set aside for rainy days is a smart and practical idea, especially when money is tight and there’s no room for surprises. Creating an emergency fund is a way to protect your finances that’s also a good financial habit to have.
An emergency fund is a dedicated reserve of cash that’s separate from your savings account, and it doesn’t have to be at the same credit union or bank you currently use. For example, a Travis Credit Union Target Savings Account is perfect for this because it earns interest, has no monthly fees and is federally insured, so your funds remain safe.
What Is an Emergency Fund (and What’s the Goal)?
An emergency fund acts as a safety net for when unexpected events arise that require a payment, purchase, payout or some other cost. Having funds available means you don’t have to borrow money and go into debt. The goal of the account is to be prepared for financial surprises and have peace of mind.
What Counts as an Emergency (and What Doesn’t)?
For this topic, an emergency is defined as an unexpected expense or loss of income that can affect your financial stability, such as losing a job, unexpected medical bills or urgent car or home repairs. In comparison, regular bills, shopping and vacations are not considered emergencies. For those expenses, consider using the Sinking Funds method, where you set aside a specific amount of money regularly for a known future expense. This way, you don’t have to dip into your emergency savings.
Emergency Fund — How Much Should You Save?
It can be difficult to know how much to save. Start with a small amount of money and regularly add to it over time. The general rule of thumb for an emergency fund is to have a month’s worth of essential living expenses. After that, aim to have up to six months’ worth of expenses covered.
To determine your one-month amount, add up your expenses for a month including rent, utilities, car payment, food and gas. The TCU Knowledge Base’s Emergency Fund Calculator can help you get started.
How Do You Build an Emergency Fund When Money Is Tight?
It’s possible to build emergency savings even when money is tight. Implementing a micro-savings plan, such as saving $5 to $25 to your emergency fund each week, lets you start small but save big over time. Another way to save is to use the “found money” rule, where you save any unexpected or extra money that comes your way.
Another tip to find money is to do a quick “leak plug” analysis, which is a checklist of recurring, unnoticed charges, such as subscriptions, you pay that can drain your budget. By eliminating these, you can allocate more funds to your emergency savings.
Best Way To Build an Emergency Fund (and Build It Fast)
The best way to build your emergency fund is to stick to regular deposits. You can automate deposits by using direct deposit each payday, making it convenient and easy to build your savings. To kickstart your emergency fund, try cutting unnecessary expenses for an entire month and putting the money into your fund.
Emergency Fund and Savings — What’s the Difference?
Your emergency fund is for unexpected expenses that you are not prepared for while your normal savings account is for expected expenses, such as auto insurance, a planned vacation or holiday shopping. It is important to think of your emergency fund as a separate resource that should only be used as a last resort.
Where Should You Keep Your Emergency Fund?
Your emergency fund should always be kept at a financial institution, in an account that’s easily accessible, earns interest and is federally insured. For example, a TCU Target Savings Account or Jumpstart Money Market Account (MMA) does all this. The Jumpstart MMA earns higher interest rates with no monthly maintenance fees. Also, you should not use investments to build your emergency fund due to their volatility.
Setting Up Your Emergency Fund so You Don’t “Accidentally Spend It”
Keep your fund separate from your checking and savings accounts so you don’t accidentally spend it. Rename your account “Emergency Fund” to eliminate any confusion. If you must use your emergency fund, be sure to have a plan to rebuild it.
How TCU Can Help
Ready to start your emergency fund? Open a Travis Credit Union Target Savings Account or a Jumpstart MMA today! TCU also has other ways to save with share certificates and business savings accounts. Enroll in direct deposit to your new account and watch your fund grow each payday.
Use TCU’s top-rated mobile banking app to keep tabs on all your accounts, as well as explore all the resources and tools available to you as a member. This includes Knowledge Base, where you can view free online courses on money-related topics, such as saving money, budgeting and more.