Depending on who you ask, only 63-66% of Americans have an emergency fund. This means most people do not budget for the unexpected and must draw money from elsewhere (including credit cards) in the event of an emergency.
Even if your current budget doesn’t allow a lot of wiggle-room, there are still measures you can take to start building an emergency fund. Here are some of the common questions people have regarding emergency funds:
How Much Should Be in an Emergency Fund?
The recommended amount for an emergency fund is enough for 3-6 months of expenses (like bills and groceries — the necessities). This Emergency Fund Calculator can help you determine the ideal amount you should have saved. Trying to save for 3-6 months can seem daunting, especially for households with only person generating income. Aiming for a starting point of two weeks, especially if it’s just for a single person household, can be enough to help through an unexpected expense. The 3-6 month range is helpful for those who have families and/or those who want to a buffer in the event of an unexpected job loss. This article notes that unless your lifestyle changes (i.e. you purchase a car and have a new payment), you can usually stop contributing to an emergency fund and put this money elsewhere.
What Should an Emergency Fund Be Used For?
As NerdWallet says, “emergencies” are not situations where you find something on sale or decide to take a spur-of-the-moment trip. Dipping into this fund for “fun money” is a form of financial self-sabotage that will haunt you when you actually need that money. Some examples of proper emergency-related fund use include medical emergencies, natural disasters, losing a job — any unexpected event that could have an impact on you financially. The ultimate goal of an emergency fund is to provide a cushion when unexpected events occur and keep you out of debt.
My Budget is Just About Spoken for, How Do I Save?
When you’re starting from scratch and don’t have much disposable income, the idea of an emergency fund probably seems trivial. Brokepedia recommends, at the very least, starting by setting $1 aside every day, which will add up to $365/year. Another tip is to dedicate your spare change to this fund, which should accelerate the growth. Every little bit counts and as long as you’re patient with the amount of time it will take to build up the savings you need.
Where Should My Emergency Fund Be?
This is a matter of personal preference. To stay organized and prevent dipping into your emergency fund, having it separate from your other accounts is usually recommended. Most people choose to do this in the form of opening a savings account. However, you may also decide to put it in a different type of account if you want to shop around for more competitive interest rates. This post from The Simple Dollar explains you will want it to be “safe, reliable, and accessible.” This is why savings accounts are usually ideal — they are consistent and you can access funds whenever you need to (as opposed to if you built your emergency fund in stocks). Those who are preparing for natural disasters tend to prefer keeping their funds as cash, which is a matter of personal preference.
Building an emergency fund should relieve stress rather than cause it — if disaster strikes, you will have one less thing to worry about!