The Dos and Don’ts of Emergency Funds
You’re thinking of building yourself an emergency fund. You’ve lived without the safety net long enough, and now you’re ready to change that.
Before you open an account and add your savings to it, you should read these dos and don’ts for making emergency funds.
DO: Put the Fund in the Right Account
You know that you should store your emergency fund in a savings account, but you shouldn’t just choose any savings account. You’ll want to pick a high-yield savings account, which comes with a higher interest rate than a standard savings account. This type of account can have an annual percentage of up to 5%. That should help your balance grow without any effort on your part.
DO: Make It Accessible to the Household
Do you have a partner or roommate that you share a household with? Then, you should definitely get a joint savings account for your emergency fund — not a solo one. Not only will a shared account make it easier for the household to contribute to the emergency fund, but it will also make it easier to tap into the balance when faced with an urgent expense.
You don’t want only one member of the household to have access to these savings. What if that person isn’t present when disaster strikes? The other person shouldn’t have to wait until the accountholder returns or sends them money to resolve the problem. They can access the fund when they need it most.
DON’T: Make Unnecessary Withdrawals
Your emergency fund should only be used for emergency expenses. Period. Making a withdrawal for non-emergencies is undermining the purpose of the fund and dwindling the savings that you’ll want to have available for actual emergencies. You’re shrinking your safety net and doing yourself a disservice.
Also, you should know that many savings accounts will have limits on how many withdrawals or transfers you can make in a month (typically 6). If you cross that limit, you will still be able to make a withdrawal, but you will be charged an excessive withdrawal fee.
DO: Budget for Savings
Your emergency fund should be a category in your monthly budget. If you don’t have a budget yet, you should start one right now. Download one of the top budgeting apps on your computer or smartphone and start following the instructions. This will help you calculate how much you can actually afford to move into your emergency fund every single month.
In addition to a budget, you should make a budget calendar. A budget calendar is a calendar that helps you keep track of all of your important financial dates, like paydays and bill payments. If you’ve never made one before, find out how to use a budget calendar and follow one properly. Having this financial tool in your back pocket should help you stay organized with your finances.
How can this help with your emergency fund? If you decide to automate your emergency fund contributions, you should add the transfer dates to this calendar.
DON’T: Stop Contributing
A small emergency fund is better than nothing, but you shouldn’t be fine with putting away a small amount of savings. Keep contributing to the fund so that it becomes a substantial safety net.
Some financial experts even recommend that you have between 3 to 6 months’ worth of expenses stored away in your emergency fund. That may seem like a lot at first glance, but the purpose of this substantial amount of savings isn’t just to pay off sudden household repairs or replacements. This amount of savings could help you get through serious times of financial upheaval, like if you ever lose your job or fall ill. You can fall back on this financial cushion when you can’t depend on your usual stream of income.
So, don’t stop contributing to your emergency fund until you’re sure it has enough to get you through a serious rough patch.
You can build a strong and supportive emergency fund. Just follow these tips and get started!
