Why You Should Have An Emergency Fund

​Setting money aside for emergencies can help you pay for unplanned expenses without incurring debt.  Establish a savings goal for your emergency fund and use some of the tips given here to set money aside.  Get started as soon as possible since you never know when an emergency will strike.  An emergency fund can help you recover quicker and avoid debt.  

Why You Should Have An Emergency Fund
By Pierre Mouchette | Bits-n-Pieces

We have all faced financial emergencies!  But, if you do not have money to cover their cost, it could place you in a serious financial situation.  Building up an emergency fund will help you move through the crunch and avoid debt.
 
What Is An Emergency Fund?
An emergency fund is a savings account set aside expressly for unexpected expenses.  It provides a buffer so that you will not have to:

• Dip into your retirement money
• Max out your credit cards
• Obtain a loan
• Worry about your credit score

 
What Type Of Emergencies Does An Emergency Fund Help?
Random financial mishaps can happen at any time.  Here are some of the sudden setbacks that an emergency fund can help with:

• Appliance breakdown - according to HomeAdvisor, if an appliance needs repair, you can expect to pay $106-$243 this year for repairs, or you may have to buy a new one, which can cost even more.
• Job loss - an emergency fund can help bridge the gap between your benefits and expenses. 
• Pet problems – according to the ASPCA, the low to mid costs of treating a dog in 2021 can range from $250 to $4500.
• Taxes - if you end up owing taxes come April 15, an emergency fund can help you avoid debt. 
• Vehicle trouble - according to the AAA, America's crumbling infrastructure is felt by drivers across the country with unexpected car repairs.  A 2021 survey proclaimed that potholes alone caused one in ten drivers an average repair cost of $600.

 
How Much Money Should Be In An Emergency Fund?
Experts recommend saving 3 to 6 months' worth of expenses to protect you if you suddenly lose your job.  Consider starting small if that amount seems too far out of your reach.
A good starting point is to look back at the last 6 to 12 months and add up all unexpected expenses.  It will help you set a savings goal and determine how much of each paycheck to set aside.
Still not sure?  Consider an initial goal of $500.  That amount will help you cover expenses such as replacing a brake hose or repairing a small appliance.  Once you save $500, you can set a new goal, such as $750 or $1,000.  Continue adding to your fund until you have saved up enough for a month's living expenses, then go from there.
 
How Do I Build My Emergency Fund?
Building your emergency fund depends on several factors, such as your income and ability to live below your means.  The most crucial step is getting started and forming a savings habit.  The more consistent you are in stashing money away, the easier it will be to grow your emergency fund.  But even if you cannot put much money away every month, any amount will get you closer to your goal.
Some techniques for building up your fund include:
Setting a monthly savings goal.  Once you figure out the total amount you need, set aside a specific dollar amount or a percentage every payday.  One common approach is the 50/30/20 budget, were out of each paycheck:

• 50% goes to necessary monthly expenses (think housing and food)
• 30% is for optional expenses
• 20% goes into the emergency fund account

If that seems overwhelming, start smaller, even $25 per paycheck adds up.  Try to increase that amount and see if you can work up to 20% of your pay.
 
Where Do I Put My Emergency Fund?
A dedicated savings account at a bank or credit union is the best place to put your emergency fund.  You might want to open an account at a financial institution other than the one with the accounts you use for daily expenses.  It will help you avoid spending your emergency funds on nonemergencies.
Make sure your emergency fund is easy to access immediately.  It means keeping it in a savings or money market account rather than a certificate of deposit (CD), stocks and bonds, or real estate.  That way, in a crunch, you have access to your funds without needing to conduct any business first.
 
When Should I Use My Emergency Fund?
Establishing guidelines for when you can use your emergency fund is important.  Use it only for unplanned expenses you cannot cover with your regular paycheck.
It might include unexpected crises such as:

• Your vehicle breaks down
• Your HVAC system or appliances give out
• You get sick and cannot work
• You or a family member have a sudden medical emergency
• You have used up all your regular savings and have an urgent expense