3 to 6 Month Emergency Fund
Goal: Save 3 to 6 months of expenses as fast as you can.
Step 3: Save 3 to 6 months of expenses to fully fund your Emergency Fund.
According to Bankrate’s Annual Emergency Fund Report, 57% of Americans could not cover a $1,000 emergency in cash, without going further into debt.
Let’s be different!
Having a little cushion in case of an emergency helps reduce some of the stress and anxiety around money.
When you have a fully funded Emergency Fund, and the water heater goes out, it is now an inconvenience instead of a full blown panic. If you get laid off from your job, having a 3 to 6 month cushion helps alleviate the stress, while you look for a new job.
After paying off all of your debt, minus the house, save 3 to 6 months of expenses for your Emergency Fund. The amount of savings will depend on the amount of risk you are willing to take. I highly recommend 6 months, to ensure you have plenty of “cushion.”
Your fully funded Emergency Fund should be able to cover 3 to 6 months of expenses. Using your monthly budget, you can figure out your monthly expenses.
Build your fully funded Emergency Fund as fast as you can, before investing, saving for college, and paying off the house.
FAQs
-
Emergencies are unplanned events that are not accounted for in your budget AND without having money to cover the expense will cause you to go into debt.
A few Emergencies:
Job Loss
Emergency Room/Urgent Care Visit
Automobile breakdown
A few things that are NOT Emergencies:
Christmas (it’s December 25th every year.. Plan accordingly)
New Clothes/Shoes
Concert Tickets
A new puppy/kitten
HOA Payments
Summer Camp
A new swimming pool/deck
-
An Emergency Fund is cash set aside that will help cover the cost of an emergency without putting you further into debt.
An Emergency Fund also gives you peace of mind and reduces stress and anxiety if an unexpected emergency occurs.
-
You should have a 3 to 6 months of expenses saved in your fully funded emergency fund.
The number of months of emergency fund is up to you, depending on the amount of risk tolerance and peace of mind you would like to have.
-
Utilize your monthly budget to identify your monthly expenses.
A few expenses to consider include: Food, Housing, Transportation, and Utilities.
-
Now we are starting to save more than your initial $1,000 emergency fund.
Start looking into High Yield or Online savings accounts. These usually have a significantly higher interest rate. Make sure that the account is FDIC or NCUA insured.
While your money is in the account, the interest helps grow your money.
Example:
Savings Account 1 offers .15% interest and you have $10,000 in your emergency fund. - After 1 year you would have $10,015.
Savings Account 2 offers 4.25% interest and you have $10,000 in your emergency fund. - After 1 year you would have $10,425.
-
Your Emergency Fund should be saved in a High Yield savings account. This allows for easy access to your funds if an emergency occurs.
-
An emergency is bound to happen. If you need to cover an emergency expense, use money from your Emergency Fund.
Stop whatever step you are on, replenish your Emergency Fund to your “fully funded” number, then re-start the step you left off on.
-
You can keep your Emergency Savings Account and Checking account at the same bank.
Do NOT link your Emergency Savings Account as Overdraft Protection to your Checking Account.
It is NOT an emergency, if you overspend your checking account.