We all know that the unexpected can happen at any time. When the unexpected involves expenses that you did not anticipate it can pose a problem, especially for those who don’t have money saved for emergencies. According to a study by the Federal Reserve, 36 percent of Americans cannot cover a $400 emergency expense – turning an unexpected flat tire, illness or home repair into a potentially serious financial hardship that could trigger long-term negative consequences.
Having an emergency fund available can help you get through these moments as well as help you maintain your financial wellness. Here’s how to build an emergency fund and when you should use it.
What is an Emergency Fund?
An emergency fund is money that you intentionally set aside for unexpected life events such as receiving medical bills, a job loss, a crash in the economy, home or car repairs and other needs. Ideally, your emergency fund should cover your basic living expenses for three to six months. These funds should only be used for true emergencies and should not be considered for use as discretionary spending.
Emergency funds provide a financial hedge against life events such as a loss of income and are intended to help reduce the negative impacts when the unforeseen happens. Having extra funds available provides some peace of mind because you know you’ll be able to handle an unplanned expense if you ever need to.
Having an emergency fund also prevents further economic pressure by helping you avoid using credit cards, loans or turning to family members for financial help.
How to Start an Emergency Fund
The first step to building an emergency fund is to determine how much money you’ll need. If you haven’t yet, create a monthly budget that shows all of your income and expenses. This will identify how much money you’ll need to have monthly to maintain your household in case of an emergency. Then multiply that monthly number by three to six months, and that number will be your money savings goal.
Next, identify where and how you want to begin saving. A great place would be Travis Credit Union, which has a variety of Savings and Money Market Accounts to choose from. The easiest way to save is to set up direct deposit to your emergency fund account. You’ll have a designated amount of money automatically deposited into your emergency fund each payday.
If you’re starting on your first $1,000 in money savings, you’re not alone: nearly 60 percent of Americans have less than $1,000 in their savings account. If you currently have debts such as credit card balances or auto loans, continue to pay down your debt as reasonably as possible.
Ideally, you should save three-to-six months of basic living expenses. This threshold falls in line with the average duration for unemployment in the U.S., which is just over five months, according to the U.S. Bureau of Labor Statistics.
When should you use your emergency funds?
Before tapping into your emergency fund, review the financial need thoroughly to ensure you are making the right decision. For example, define emergency and then ask yourself if this is an urgent and essential need or if it is something that you could do without for now. An essential need usually directly affects your employment, your health or your living situation.
If you do use your emergency money, do not stop your direct deposits to the account so that you can replenish your reserves over time.
Start Saving Today!
A great way to start your fund is with a Travis Credit Union Jumpstart Money Market Account. This account pays the highest interest for the lowest balances. Another option is a TCU checking account, which gives you the flexibility to write checks and to use a Visa® Debit Card to pay for emergency expenses.
To get a bigger picture of your finances, take our Financial Wellness Assessment to see where you are in your financial journey. You can then read up on financial topics through our Financial Wellness Blog.