The Federal Reserve reported in 2020 that more than one-fourth of adults had insufficient funds to withstand a $400 financial emergency. Protect yourself and your family by creating an emergency fund as a financial fallback.
What is an Emergency Fund?
An emergency fund is money you can access quickly and easily if faced with an unanticipated financial need. A well-thought-out safety net can help cover your unexpected expenses while preserving the money you have earmarked for your monthly bills and day-to-day costs.
The right emergency fund also allows you to cover surprise bills without racking up high-interest credit card debt or being penalized for early withdrawal from a certificate of deposit or retirement account.
An emergency fund can be helpful for:
- Car repairs
- Home repairs
- Medical bills
- Job loss
- Unplanned travel
An emergency fund is not for non-emergency, predictable expenses such as holidays, birthdays, and vacations. However, you should have a fund for expenses such as these as well.
How Much Money Should You Keep in Your Emergency Fund?
Determining how much money to keep in your emergency fund depends on your lifestyle, personal finances, budget, and financial goals. Follow these steps to come up with a starting amount:
- Cover your expenses first. Determine how much money you need to cover your monthly living expenses, including childcare, student loans, and rent or mortgage. Double your monthly expenses and add a buffer to cover day-to-day spending. This total is a recommended monthly account balance for your primary checking account.
- Determine your emergency savings goal. A general rule of thumb is to save three to six months of expenses. Using your total monthly costs and the general rule of thumb, calculate an amount you can save that meets your income and comfort level.
- Create a plan. Create a plan with a realistic goal and short- and long-term timeline indicating exactly how you plan to save the emergency money. Remember to cover your expenses first, then fill your emergency fund with extra money.
Whatever amount you select, re-evaluate and adjust your plan and goals as your income level or expenses change.
How Do You Build Your Emergency Savings?
Here are suggestions to help you build your emergency fund:
Automate your savings. Make saving a habit. Each payday, automatically transfer or use direct deposit to put a set amount into your emergency fund.
Grow your money. Use credit union and bank interest rates to your benefit. Traditional savings accounts offer quick access to your money, but the interest rates are low. A higher-interest money market account allows you to withdraw funds anytime and can help grow your emergency fund faster.
Reduce frivolous spending. Limit spontaneous purchases and look for ways to cut your monthly expenses to free up extra money to transfer to your emergency fund at the end of the month.
Take advantage of an influx of cash. Deposit all or part of your tax refunds, government stimulus checks, bonuses, or cash gifts into your emergency account.
Entrust Your Emergency Fund to TDECU
An emergency fund will give you financial security and peace of mind that you are protected when one of life’s unwelcome financial surprises comes your way.
TDECU offers various financial services perfect for helping you build your safety net. Contact us today to learn more about our money markets, high-yield accounts, and other savings accounts.