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What Should Your Emergency Fund Look Like?

Emergencies can come in all shapes and sizes, but a well-stocked emergency fund may help you prepare to weather a financial storm.

It could be hard to keep your wits about you when you’re under pressure.  For instance, your child has a serious fever, and you have to take them to the walk-in clinic, or your car won’t start, and you need it to get to work.

In situations like these, you probably don’t want to worry about how you’ll cover these expenses.

Unfortunately, not everyone has an easy time covering emergency expenses. According to the Economic Well-Being of U.S. Households, if faced with an unexpected $400 expense, 27 percent of those surveyed would have to borrow or sell something to pay for the expense, while 12 percent of those surveyed wouldn’t be able to cover it at all.

While an installment loan or line of credit may provide a safety net in case things go wrong, an emergency fund should be your first line of defense against unexpected expenses.

But while an emergency fund is an important part of your finances, it may not always be clear when you should use it or how you could build it.

Read  this MoneyKey guide to the emergency fund to find out what it is and why it’s so important.

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What is an Emergency Fund?

Have you heard someone say that they’re squirreling money away? If you’re a regular reader of the blog, you’ve likely seen it here. Try to spot it in our post about the reverse budget.

An emergency fund is a special savings account that may help you out in a tight spot, so you don’t have to rely on a  direct lender or any other lender for financial help when emergency strikes. True to its name, it’s emergency money that could boost your budget in case an unexpected expense requires more than the cash you have on hand.

Let’s say your car is making funny noises and the cost of the subsequent repairs is higher than you expected. You may draw from your emergency fund to cover the bill.

Your emergency fund may also provide a safety net in case things go wrong. If you’re lucky, this emergency money could help you handle a sudden layoff or a health scare.

a jar of American quarters next to three stacks of quarters growing plants on a table

How is an Emergency Fund Different from Other Savings?

When most people think of savings, they may be thinking about the money they set aside for big life goals. For instance, it could be money that makes up a decent-sized down payment on a house or a retirement fund that may help someone live out their golden years in comfort.

In other words, these could be long-term investments that you don’t touch for years or possibly even decades. These funds may sometimes come with interest rates that allow wealth to grow over time, and there may be limits on how and when you may dip into particular funds.

By comparison, emergency money is something you should be able to access quickly, easily, and often. This fund is there in case you need help covering emergencies.

How Big Should Your Emergency Fund Be?

It helps to have a goal in mind when building up an emergency fund, and each goal can be unique. How much you end up setting aside depends on a lot of factors, including your income and your living expenses.

If you are unsure about how much you should save to be safe, a common rule of thumb is to set aside three to nine months’ worth of expenses.

But some financial experts say that isn’t enough, including bestselling authors Suze Orman and David Bach, and they may be right.

Circumstances such as household repairs, health scares, and job loss may be a considerable financial challenges — even if you have an emergency fund. Depending on your emergency, it may take you longer than nine months of expenses to recover.

a close up of Benjamin Franklin’s eye on a $100 bill

Orman says that you should have at least 8 months worth of living expenses saved, while Bach believes you should aim for at least 12 months of living expenses. Having a full year’s worth of money saved may provide you with greater financial security.

Set the goal that fits your finances

A full year’s worth of expenses is no easy feat, no matter how much you make. It’s especially challenging if you’re building savings from the ground up.

If you feel overwhelmed by this daunting goal, remember this general rule as you save:

When it comes to your emergency fund, more may be better, but anything is better than nothing.

In other words, don’t freeze under pressure. You shouldn’t let the magnitude of a goal stop you from saving. Whether it’s three, six, or twelve months of expenses, every savings account has to start somewhere — even if it starts with just $10.

Some people may find it easier to focus on smaller goals that could hopefully lead to eventually saving a full year’s worth of income. Conceptually, saving$400 is less daunting than saving $30,000 or more, but it may still provide a decent safety net when you face an unexpected auto or medical bill.


How Do You Build an Emergency Fund?

An emergency fund doesn’t appear overnight — whether it’s $400 or a year’s worth of expenses. No matter what your goal is, reaching it will take time. And more specifically, it relies on deliberate, long-term habits that help you make consistent contributions. Take a look at the list of tips below to see what you can do to give a boost to your emergency fund.


1. Make a budget

Behind every emergency fund is a well-made budget. This   may help you keep your finances on track so you can save enough money for everything from short-term hiccups to long-term illnesses or job losses.

If you’ve never made a budget before, you’ll want to check out this quick resource for a simple overview of common budgeting methods. It provides a solid base of financial information, and it may be helpful to revisit as you update your budget.

2. Trim down your expenses

When making your budget, pay close attention to your outgoing cash. You’ll want to pinpoint expenses you may be able to reduce or eliminate entirely to increase your savings.

For the most part, you’ll find it easier to tackle small, variable expenses first. These are expenses like groceries or clothing.

Cutting back on these things may help you see savings quickly compared to larger, fixed expenses — like rent or car payments. These expenses take more work to change, like moving to a new apartment or improving your credit.

Both are possible, but it could be easier and faster to tackle what you spend on food first.

close up of a hand holding five one hundred American bank notes vertically in front of a white background

3. Ask yourself, is it really an emergency?

In the heat of the moment, it really can seem like getting the latest phone is a life-or-death situation. But with a little perspective, you can admit that upgrading your tech is hardly that urgent.

Dipping into your emergency money to pay for non-emergencies isn’t necessarily a good idea. You might empty out your emergency fund by the time you really need it to cover an unexpected expense.

The next time you feel like you absolutely need to buy something outside of your usual budget, step back and really think about it.

You may have a better chance at hitting your emergency money goal by not touching the money in the fund. You should wait until you need it for something urgent, like an emergency roof or AC repair.

4. Make changes to your banking

Your choice of saving account may help you build your emergency fund faster. It all depends on the interest you manage to earn.

Generally, some basic savings accounts will barely earn 0.10 percent. This is negligible in the grand scheme of things, as it doesn’t even cover the rate of inflation.

You may find a savings account with a higher interest rate by going online. Some online banks offer high-yield accounts that could earn more than 2 percent interest. Although this may not seem like a huge gain compared to 0.10 percent, but it does add up!

Do your research and look for an account that doesn’t require a minimum balance. You’ll need an account you may access at any time without penalty. This way, you won’t get dinged in case you need to withdraw emergency money.

5. Make saving automatic

Contributing to your emergency fund may not always be at the forefront of your mind. You’re busy! Between paying your bills and living your life, I may be easy to forget to save one month.

But one month may easily turn into two, three, or more if you’re not careful.

If you find it hard to commit to your plan, automating your contributions may be a solution. You could possibly set it so that your bank moves cash at the top of each month or on every payday.

What Happens if Your Emergency Fund isn’t Enough?

In the best-case scenario, your emergency fund could do its job, which is either covering the cost of your emergency expense. If you’re lucky, you may still have some cash left over for future expenses.

But every good financial plan has a plan B. You need to consider the possibility that your emergency fund might fall short of what you need, and you should have a plan in case that happens.

How You Could Get Emergency Money

There may be a few of reasons why your emergency fund might fail. You might face an unlucky string of expenses, or you may lose an entire paycheck due to illness.

If your fund comes up short, you may need to find emergency financial assistance for help.  

When you’re in a tight spot, speed and convenience come first. Take a look at the tips below to learn how to get emergency money quickly.

1. Join an app

You may be able to earn the cash you need by going online. There are plenty of apps that help you find odd jobs or opportunities to sell your belongings — all with the aim to line your pockets.

smiling brunette woman in blue dress shirt holding a phone while sitting in a café with a mug on the table in front of her

One app that could help you earn some extra cash is Task Rabbit. If you enjoy putting together IKEA furniture, are handy with a drill, or are happy to do any number of other small tasks to earn money,  TaskRabbit may be a suitable option. It matches you with people who need help with everyday tasks — from chauffeuring someone around town to household handiwork. You’ll earn money for every task you complete.

2. Take out an installment loan

These short-term loans may be faster and easier to get than personal loans offered by mainstream banks.

They may have online application processes that provide quick responses, so you’ll know if you qualify as soon as possible. In some cases, you may even get your installment loan one business day after you’re approved.

Just note that installment loans are better suited for unexpected bills with urgent due dates since these are typically expensive forms of credit. When it comes to online loans, we offer installment loans designed to help cover brief, yet unavoidable, bills or repairs.

They aren’t a permanent replacement for an emergency fund. If you are unsure about when it’s appropriate to apply for  an installment loan, these FAQ about borrowing an online loan may help you make your decision.

a penny dropping into the slot of a pink piggy bank on a white table covered in American quarters dimes and pennies

Bottom Line: A Good Plan Includes an Emergency Fund

You may not always be able to predict what your emergency will be or when it will strike. But you may face financial hiccups with greater confidence as long as you have a robust emergency fund.

Don’t worry if you’re far off from your goal of a year’s worth of expenses. The important thing is not how much you start with but that you start at all. Try to make your savings a priority in your monthly budget and set aside cash just in case.

Another thing to remember is you can never have too many contingency plans. If an emergency fund is your Plan B, then an online loan may be a backup. If your emergency fund falls short of covering an unexpected bill or repair, call us to learn more. An installment loan or line of credit may provide another safety net for when things go wrong.

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