A Simple 6-Month Emergency Fund for Beginners
An emergency, whether it’s a sudden illness or the loss of a job, can lead to a large expense. That’s why building a 6-month emergency fund can be the difference between a financial inconvenience and a full-on crisis.
Like with most financial problems, planning ahead is key to protecting your family. Emergencies are an inevitable part of life, but having an emergency fund can make all the difference.
What Is an Emergency Fund?
An emergency fund is money that you set side aside to cover unexpected expenses. Having these safety funds is vital for financial planning.
According to Paul Golden, the spokesman for the National Endowment for Financial Education, the golden rule of an emergency fund is that it should cover three to six months of expenses. This money serves as a safety net during a financial crisis. It can help cover the loss of a job, a surprise medical bill or a major car or home repair. It’s a financial line of defense.
What Are the Benefits to Having an Emergency Fund?
In short, an emergency fund gives you financial stability. It can protect your wallet, investments and credit. And the impact of the recent recession has taught many Americans the importance of saving. You never know when a financial crisis might hit…
In a study conducted in 2015 of more than 7,800 households, the Pew Chartitable Trusts found that 60% of households had a financial shock within the previous 12 months. The study also found that…
“More than half of households struggled to ‘make ends meet’ after their most expensive financial shocks. Nearly 50% still had not recovered at the time of the survey, which for most was at least six months after their destabilizing shock.”
How Much Should I Save?
To play it on the safe side, it’s good to have a 6-month emergency fund saved up. And to figure out how much you need, you can look at your living expenses. Most households have a set of fixed expenses that they pay each month. As a result, people tend to have a rough budget each month.
Common living expenses include…
- Debt payments.
Expenses that fall outside of needs are not necessary to add. If you fall on tough times, you can always cut them out. And these discretionary expenses can include…
- Nonessential shopping
- Dining out
Making small adjustments to your lifestyle, like limiting dining out and subscriptions such as cable, can keep more money in your wallet.
How to Calculate a 6-Month Emergency Fund?
To calculate how much you need to save for your 6-month emergency fund, start by adding up your monthly living expenses. Take those amounts and multiply them by six. For example, if a family needs $2,500 a month to cover critical living expenses, it should aim to have $15,000 reserved in emergency funds.
Let’s now look at a better breakdown of the process…
To Start Off, Begin by Adding Up Your Monthly Expenses
- Rent or mortgage payments
- Grocery spending
- Utility payments (gas, electric, water, garbage)
- Transportation costs (car payment, gas, public transit)
- Insurance for your car, health, and home
- Credit card and loan debt payments
- Telecom services
- Set a Monthly Savings Goal to Put Away for Your Emergency Fund
Saving six months of living expenses can sound tough… but you can easily achieve this by setting aside money on a consistent basis. For example, if you saved $250 a month, you would have $3,000 after one year.
Once you have calculated the amount you need for a 6 month emergency fund, set a goal to save a set amount of money for your emergency fund monthly. Get in the habit of putting money into your account on a set date every month.
Evaluate and Assess Your Savings.
Check in on your emergency fund after a few months. You can check your progress and adjust your savings if necessary. For example, if you’ve recently had a big expense and pulled some money from the fund, you can consider saving more to build it back up.
You can increase your funds by reducing unnecessary everyday costs and reinvesting this extra money. Few Americans seek out simple strategies to reduce the cost of life’s expenses. But by taking the time to learn about cost reduction strategies, you can save thousands of dollars.
Where Should You Put the Emergency Fund?
You want to use this money only for emergencies. Because they tend to come without notice, it’s good to use a liquid bank account or investment to hold your funds. This means you can access the money quickly without seeing a big change in its value. Two suitable choices are high-yield savings accounts and money market accounts.
High-Yield Savings Account
These accounts offer a higher annual percentage yield on deposits than traditional savings accounts. As a result, your money will earn more interest over time. High-yield savings accounts can also carry fewer fees than traditional saving accounts. If you choose the right account, you won’t have to deal with minimum balance requirements or maintenance fees.
People usually open high-yield savings accounts online, but you can also get them at a brick-and-mortar bank. Many people prefer the online method because of the convenience of online banking. Here are some of the best online savings accounts.
Money Market Account
A money market account is a savings account with added features. With certain accounts, you can get a checkbook or a debit card that allows for a limited number of transactions every month. This can be helpful in the case of an emergency when you need to access your funds quickly.
A downside to this account is that it can require a higher minimum deposit than a savings account. Many banks let you open an account for free, but a money market account might require a larger sum of money to open. A money market account may not be suited for you until you’re able to increase the size of your emergency fund.
Some people opt for a money market account because it can allow for easier and faster access to funds. You can learn more about a money market account here.
Start Investing in Your Emergency Fund Today
It takes time to build an emergency fund, but having one is an important part of a stable financial plan. An emergency fund is something many Americans fail to invest in. But failing to financially prepare for life’s inevitable emergencies can leave you in a crisis. By building up a 6-month emergency fund for the unexpected, you can protect yourself and your loved ones.
If you’d like to learn more about saving and investing, consider signing up for Liberty Through Wealth. It’s a free e-letter that’s packed with investing insight. Whether you’re a beginner or an experienced investor, there’s something for everyone.