Have you ever experienced an emergency where you needed to spend money that you hadn’t planned to spend? That’s where your emergency fund comes in! Depending on your goals, it is important to save and invest for the future, but also, you will want to keep some of your money in cash in case you find yourself in a tight spot. Your car broke down, your basement flooded, or you lost your job. All these situations will require some cash which if you don’t have, can become debt you don’t want! Emergency borrowing always has a high cost. Credit cards charge 20%. Early 401(k) withdrawals come with a 10% early withdrawal penalty on top of taxes. Keeping a pile of cash handy is the easiest way to avoid unexpected, expensive debt.
How much should I save in my emergency fund? It is recommended to have three to six months’ worth of expenses in an emergency savings account. This number will vary person to person based on your fixed expenses, lifestyle, and dependents. It is not a hard and fast rule. Think of the loss of income example: if you lose your job, you will probably need a few months to find a new one and will need some readily available cash to sustain your way of living during that time. Consider your monthly fixed expenses: mortgage or rent, utilities, insurance, groceries, and many others. Another way to think of the number in your emergency fund is to think of any emergencies you have had in the past: how much have you had to pay for a sudden medical expense? This will help you visualize how much you should put away into savings. If this number seems daunting, you can start small: make an automatic deposit each time your paycheck comes in. It doesn’t have to be huge, but if it is consistent, it will take you closer to your goal! Check out these money savings apps that could help with reaching your money goals!
Where should I keep this money? If you have a bank you use and love, you can create a separate bucket or savings account within the same bank to keep the money separate, yet accessible to you at any time. If you are not sure where to put this fund, a high-yield savings account is a great option! Your money will earn some interest (which will help you reach your goal quicker) and will be readily accessible, a win-win situation. If you need help estimating your emergency fund number, this calculator can help come up with a general number, but remember this number will come down to your personal needs and situation. Check out our most recent blog post to learn how small changes can have a big impact on your financial plan.
Katerina Logrono is a Paraplanner at Willow Planning Group, LLC. She is primarily responsible for supporting you in reaching your personal financial goals. Katerina loves exploring new places while helping you live your adventure too!