Life can be unpredictable, and unexpected emergencies happen. One of the best ways to offset surprise financial burdens is to regularly save money to help cover them. Learn how an emergency fund can help you plan for the future and improve your overall financial wellness.
What is an emergency fund?
An emergency fund is a cash reserve that’s intended to be used for unexpected situations. The money you save in an emergency fund can help offset costs that can come up, such as a surprise medical bill or expensive home repairs. Having an emergency fund could reduce the need to use credit cards or loans when you’re faced with unforeseen expenses.
How much should you have in an emergency fund?
The amount you should have saved in an emergency fund will depend on your financial circumstances. There’s no exact amount, but as a general rule of thumb, your emergency fund should be enough to cover three to six months’ worth of expenses.1
How to start an emergency fund
Here are some basic guidelines that can help set you up for success.
1. Make a budget: List out your monthly income and expenses to get a better idea of how much money you have at your disposal. Budgeting helps you organize and manage your finances.
2. Set a savings goal: Once you’ve drafted a budget, you can determine how much you can reasonably save on a weekly or monthly basis. It’s okay to start small. You may be surprised how quickly $10 or $20 a week can add up. Try to stay consistent and save regularly. After reaching your initial goals, consider incrementally setting them higher.
3. Automate your savings: Setting up automatic, recurring transfers to your savings account is a great way to start building up your emergency fund. If you get direct deposits through your employer, you may be able to split it between two accounts to automatically set aside funds for savings. You can also set up automatic transfers with your bank or use an app to regularly schedule contributions.
4. Try to only use funds for emergencies: While the occasional dip into your emergency fund for non-emergency situations may be okay, you should ultimately strive to only use it when you need it most.
5. Monitor your progress: Plan to regularly check your budget, goals, and spending habits to ensure you’re staying on track. Try using a financial wellness app, like Upwise, to better help you manage and monitor your money.