What is an emergency fund?
Sometimes called a “rainy day fund”, an emergency fund is a pot of money set aside for, you guessed it, emergencies. You never know what life is going to throw your way, but a solid emergency fund will help you weather the storm. Without an emergency fund, your financial plan can easily be derailed.
Emergency funds are intended to cover major financial setbacks such as: the loss of a job, major illness/injury, or unexpected (large) purchases.
FAQs about emergency funds:
How much should I have in my emergency fund?
The short answer: at least 2-3 months of monthly income
For example, if your monthly income is $5,000, you should have at least $10,000 – $15,000 stashed away.
Some experts suggest saving 6 months worth of income, but it all depends on your personal situation.
Worst case, you either lose your job or are unable to work (medical, family emergency, etc). 2-3 months of living expenses affords you the time to find a new job or recover from an injury. If your car breaks, you have the money to fix it. If your car dies completely, you have the money to buy a car that will get you around.
If you don’t have $10,000-$15,000 sitting around, set a goal of $1,000. Once you have $1,000, set a new goal for $2,000. Continue to build your emergency fund till you have a healthy amount to fall back on.
Where should I keep my emergency fund?
Ideally, your emergency fund should be in cash. I don’t mean a stack of $100’s in your dresser drawer, but you need to be able to access the money quickly in case an emergency comes up.
Savings accounts are a good place to start. The problem is, many savings accounts offer very poor interest rates. For example, my bank offers a savings annual percentage yield (APY) between .05% and .15% (depending on how much money is in your account). If my money is going to be sitting around waiting for an emergency, I would at least like it to be working for me.
Are you looking to earn some additional interest on your emergency fund? Take a look at Magnify Money’s list of high(er) interest savings options here.
Don’t dip into your emergency fund!
The holidays are dangerous for any financial plan. Getting into the Christmas spirit often includes getting into the spending spirit. Everyone and their brother is trying to get you to spend money. Hopefully, you have saved throughout the year and have a plan to handle your holiday expenses.
Whatever you do, don’t dip into your emergency fund to splurge on a last minute family vacation or fancy new gift for your significant other. Instead, throw on the yule log and plan a staycation. Instead of buying that fancy gift, make something homemade. Odds are, the gesture of taking time to make something special will mean more anyway!
While it’s nice to give others gifts and do something nice for your family, don’t let Santa get the best of you this holiday season. Your financial situation will still be there on January 1, and it’s much better to start the year on track to achieve your goal than to be digging yourself out of a holiday financial hangover.
The Wealth Hound