Why You Need an Emergency Fund

by Maggie Germano / November 21, 2016

LeavingHave you ever suddenly lost your job? Or needed a surprise root canal? Perhaps your car broke down, or your refrigerator stopped working.

These unexpected moments in life can put you into debt if you’re not prepared. That’s why you need an emergency savings account to protect you.

What’s an emergency savings account? It’s a savings account that is only to be tapped into when a real emergency arises. (And no, those Adele tickets are not an emergency!)

Alexa Von Tobel, CEO of Learnvest, likes to call this a Freedom Fund because yes, you’ll be covered in an emergency like illness or injury, but it will also give you the freedom to pursue a new career or leave a toxic work environment. It will give you peace of mind, knowing that you don’t have to worry about paying your bills right away.

Experts say everyone should have 3-12 months worth of expenses saved in their emergency savings account. If you are self-employed, or have a family to support, you want to be on the higher end of that spectrum – and that amount can change depending on shifting circumstances. For instance, right now I have 6 months of income saved but I’ll want to increase that once I’m fully self-employed.

What constitutes an emergency:

  • Medical or dental issues
  • Job loss
  • Your car breaks down (and it’s your primary mode of transportation)
  • Emergency home expenses (your roof is leaking, etc.)
  • Bereavement expenses

How to build up your emergency savings:

  • Automate! The easiest way to save is to set it and forget it! Set up direct deposit from your paycheck, or have your bank make scheduled transfers. This way, you don’t have to think about it and you won’t miss the money. You’re way more likely to save this way.
  • Choose a high yield savings account. These days, you don’t get much back in terms of interest, especially from brick and mortar banks. Open a savings account with an online bank like Ally or Synchrony, and you can get up to 5 times the typical interest rate. Before switching to Ally, I only earned 20 cents a month in interest and now it’s more like $15. Every little bit counts!
  • Don’t connect it to your checking account. You need your emergency savings to be accessible when an issue arises. You don’t want it to be in a CD or the stock market, where you can’t get to it easily. However, you don’t want the money to be too easy to spend, either. Put it in a place where you can’t transfer it to your checking account on a whim, but make sure it’s still in liquid form so the cash can actually be accessed in an emergency.

Start now!

If you don’t have any savings built up yet, don’t feel discouraged! Everyone has to start somewhere. And as Elizabeth Gilbert said, “it doesn’t get done until you begin doing it.” Even if you can only save $10 a paycheck, that’s better than nothing. It will grow faster than you think. Over time, the more money you earn, or the less debt you have, the more you can save.

Do you already have a fully funded savings account? Have you ever had to rely on your emergency fund? Share with me on Twitter!