What I Learned Building an Emergency Savings Fund (2024)

FAQs

What I Learned Building an Emergency Savings Fund? ›

determine how much you need to save

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.

Your emergency fund will help protect you from 2 different types of financial emergencies: spending shocks and income shocks. Spending shocks—like a broken windshield or a root canal—are unplanned, unwanted expenses.

While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.

First, we save for an emergency fund. Second, we save for purchases. Third, we save for wealth building. Purchases and wealth building are fun, but we can't do any of that until we cover the basics—the emergency fund.

Emergency funds should typically have three to six months' worth of expenses, although the 2020 economic crisis and lockdown has led some experts to suggest up to one year's worth. Individuals should keep their emergency funds in accounts that are easily accessible and easily liquidated.

An employer-sponsored emergency savings account (ESA) helps workers save for financial emergencies by automatically deducting an amount from each paycheck and depositing it into a separate account. If you need to cover a bill or cash gets tight, you can draw from this fund to bridge a financial gap.

Saving and investing are both important to consider in your future planning. Through saving money, your money is kept safe, and easy to access should you need it. By investing early over time, your money grows in value, benefiting from the magic of compounding.

What should I do after I've built up my emergency fund? You'll want to start investing more aggressively. If you have a 401(k) match, increase your contributions. Or, look into setting up a Roth IRA or something else on the side, [like a brokerage account].

What is another word for emergency fund? ›

An emergency fund, also known as a contingency fund, is a personal budget set aside as a financial safety net for future mishaps or unexpected expenses.

Once you're out of debt, then he recommends trying to save up anywhere from three to six months of expenses. And really, most financial advisors and experts agree that three to six months of expenses is a good goal to shoot for over the long term.

Aim to save three to six months' worth of expenses in your emergency fund.

The amount of money you need in the fund will depend largely on your financial situation, but also on your own need for security. As a general rule, you should have access to at least three months' salary in your emergency fund.

Make your emergency fund work for you

While you're not using it, though, your account needs a safe place to grow. Stashed in a high-yield savings account, certificate of deposit (CD), money market account or even a Roth IRA, your emergency fund can continue growing until the day you need it.

Online savings and money market accounts are both well-suited for your emergency fund. In addition to insurance coverage from the FDIC or National Credit Union Association (NCUA), these accounts offer the most competitive interest rates on savings products.

Generally, your emergency fund should have somewhere between 3 and 6 months of living expenses. That doesn't mean 3 to 6 months of your salary, but how much it would cost you to get by for that length of time.

The purpose of an emergency fund is to set money aside for unexpected financial emergencies and to provide a sense of financial security.