If you’re interested in saving money, you should have an emergency fund. So what is it and how do you create one?
Plain and simple, an emergency fund is money you have set aside in case of an emergency. These can range from an unexpected bill, car repair, home repair, medical bill, job loss, etc. The amount of emergencies one considers is personal.
Emergency funds are money typically stored in a savings account that can be accessed at any time to be used to make sure you don’t get into debt with an expected bill. These are very important to make sure you don’t have to use debt to pay off more debt. If you are using either the debt snowball or debt avalanche debt repayment methods, you should have a stocked emergency fund before you start.
Most personal finance experts recommend a minimum of three (3) months of your monthly expenses be stored in a savings account in case of an emergency.
An example of an emergency fund would be:
$2,000 (average monthly expenses) x 3 (months) = $6,000 (stored in savings)
The three months is just a gauge but if you are self-employed, you might want to have six to twelve months. This depends entirely on your level of comfort.
We here at Wealth Bytes recommend between three and six months of monthly expenses stored in an easily accessible savings account. This could be at your bank where your checking account is or one of the many great online savings accounts.
The money should be easily accessible or liquid, meaning you don’t store it in investment accounts, CDs, or places where it can take a long time to get the money or you get a fee for using it.
Emergency Fund FAQ
A savings account (typically) funded with money to help pay bills if you encounter an emergency such as job loss, medical bills, car repairs, or other large expenses you weren’t expecting.
It’s recommended to have between three and six months worth of monthly expenses. People who are self-employed should have between six and twelve months worth of monthly expenses.
Having one gives you the security to not have to go into debt to pay an unexpected bill. It’s like having an insurance policy.
We recommend using an online savings account or a savings account at your local bank. The money needs to be easily accessible and not tied up in investment accounts or CDs.