How to Establish an Emergency Savings Fund
An emergency fund is an important component of your financial picture. Learn how much you need and how to get started.
Establishing an emergency savings fund now can have a big payoff later on. Setting aside emergency savings can help ensure you can get by in case of illness or urgent repairs to your car or home, as well as provide a safety net if you find yourself without a job. Here’s how to figure out how much you need and how to get started.
Your emergency savings fund should be enough to cover your major expenses for 6 months to a year. Here are some important expenses to consider when determining how much to save:
Housing expenses: Your emergency fund should include savings for housing expenses such as rent or mortgage, property tax, insurance and utilities. Protecting the value and integrity of your home is of utmost importance, so it’s a good idea to also include savings for emergency home repairs.
Food: Estimate your monthly food expenses and include those costs in your emergency fund savings. You can build this savings and reduce your food expenses by cutting back on dining out at restaurants, building your shopping list around sale items and using coupons from your local newspaper.
Health care: Factor in the monthly cost for medical and dental insurance. In the event that you’re laid off, you may be eligible to stay on your former employer’s health plan for up to 18 months at your own expense through the Consolidated Omnibus Budget Reconciliation Act (COBRA).
Debt repayment: Your monthly payments for credit cards and other debt should be factored in to how much you save for an emergency fund in order to protect your credit score. Take steps now to get out of debt to avoid the stress of dealing with these expenses if you become unemployed or face a financial challenge.
Transportation: If you have a vehicle, your emergency savings should cover necessary costs such as your car loan, insurance, basic maintenance, fuel and emergency repairs.
Personal expenses: Costs related to household supplies, haircuts, clothes and toiletries may seem generally inexpensive but these expenses can add up. Remember to include these items, as well as life and disability insurance, when planning for how much you should save for an emergency fund.
Once you know what your emergency fund should cover, the next step is to set up a savings plan to build toward your savings goal. Decide on a specific monthly savings goal and then devote a percentage of every paycheck to savings. It’s a good idea to pay yourself first by establishing automatic transfers into a designated savings account. Automatic savings can go a long way to ensuring strong and steady growth of your emergency fund.
Once you’ve committed to monthly savings, take some time to consider the options for where to put your emergency fund:
Regular savings account: A regular savings account allows you to access your money whenever you want. A basic savings account is a good choice if you’re just starting to save and want to be prepared for unexpected expenses.
Certificate of Deposit: A certificate of deposit (CD) is a good choice if you want to earn a guaranteed rate of return for a set period of time (in other words, the term of the CD) and can plan for when you need to access your funds. Generally, you’ll receive a higher interest rate if you buy a longer-term CD, however there may be a penalty fee if you need to withdraw your money before the end of the term. Another option is called a Risk Free CD®Footnote1. A Risk Free CD is a term CD that offers a fixed rate of return and enables you to access your money prior to the CD’s maturity without paying a penalty.
Money market account: Money market accounts are a good option if you want higher interest rates as your balance grows, while still maintaining easy access to your funds. These accounts tend to offer a better return than a regular savings account, but may require a higher minimum balance to avoid fees.
Whatever savings account or method you choose, make sure you can access your emergency savings fund when you need it so you’re prepared for the unexpected.