Benefits of an Emergency Fund and How to Build Yours

Benefits of an Emergency Fund and How to Build Yours

Fewer than 51% of Americans have emergency fund savings that can last them for three months. This means most of us don’t adequately prepare for an unexpected financial crisis.

An emergency fund refers to a cash reserve. This is money you set aside for an unplanned crisis in the future, such as loss of income, paying medical bills, or home repairs. The fund helps make savings to cover unexpected expenses instead of applying for a loan or paying them using a high-interest credit card.

Without savings, unexpected expenses or bills can lead to too many debts. The good news is that setting up an emergency fund can help you navigate crises without unnecessary stress.

In this article, we look at the benefits of an emergency fund and how to build yours.

What Is the Difference Between an Emergency Fund and a Savings Fund?

A savings fund is an account you use to set aside money for a specific objective. The goal can be short-term or long-term. For example, you can start a savings fund if you want to purchase a new car or raise a deposit for your home.

The fund can also be a savings account for your retirement or children’s college education. You can have as many savings funds as you desire. For example, you can create a savings account for medical emergencies, retirement, and college fees.

The primary purpose of an emergency fund is to ensure that you don’t incur debt if circumstances become financially challenging. For example, an emergency fund can cushion you against a job loss or significant reduction in your income. The money you’ve saved in the fund can help cater for your expenses as you look for a new or alternative source of income.

What Are the Benefits of an Emergency Fund?

Saving money in an emergency fund comes with several benefits, including:

  • Promoting a saving culture: Creating an emergency fund motivates you to avoid the temptation of spending money on luxuries or aimlessly. If you keep money out of your reach, you will avoid the temptation of spending it on goods or services you don’t require.
  • Avoiding debt: Creating an emergency fund locution you against bad debt. For instance, if you encounter a financially challenging situation and you have an emergency fund, you will not resort to taking loans or using your credit card to incur bills and their associated high interests, fees or penalties.
  • It helps you live a stress-free life: Financial emergencies can threaten your emotional wellbeing and cause stress. If you don’t have an emergency fund, you are on a “financial edge,” and if you run into a crisis, you may not be able to maneuver successively. An emergency offers you the confidence to handle any unexpected events in your life without worry.
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How to Build Your Emergency Fund

Creating an emergency fund can be a simple exercise. The following steps will help you manage tough financial periods without stress:

  1. Create a budget and stick to it: The first step in creating an emergency fund is to evaluate your monthly income and expenses and see how much money will be available to save in the fund. You can use a budgeting tool to help you create a budget. After evaluating your income and expenses, you have a better picture of how much you can save in your fund.
  2. Set monthly savings objectives: Most people find challenges taking money from their paycheck and setting it apart for future use. If you practice saving money in an emergency fund consistently, you will be amazed at how much savings you can make. The challenge here is to arrive at a certain figure and consistently save it in your emergency fund every month.
  3. Adjust your monthly savings: Once you develop the habit of consistently depositing money in your emergency fund, you are now ready to take the next step of saving even more. Also, you can look for alternative sources of income or save money from your promotion into the emergency fund. Avoid directly depositing money into the emergency fund. Automate the process to make depositing your savings faster and avoid the temptation of spending this money in your budget.

How Much Should You Save in Your Emergency Fund?

There is no specific amount that you should save in your emergency fund. The rule of thumb is to check your income against your expenses and determine how much you can save. Experts advise you to save funds worth 3 to 6 months of your bills. You can set aside a higher amount if you have multiple sources of income.

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Another way you can determine how much to save in an emergency fund is to answer the question: If I lose my job today, how many months would it take to secure employment or an alternative source of income?

Creating a budget and tracking your expenses offers a realistic way to spend your money every month. From this exercise, you can look at ways to make savings and deposit the money in your emergency fund.

Where Should You Keep Your Emergency Fund?

The best option for your emergency fund is a high-yield savings account where you can access the funds quickly. Some of these options include:

  • A money market account that includes check-writing benefits and a debit card
  • An ordinary savings account that is linked to your checking account
  • An online bank account that allows you to transfer money quickly from your checking account. It should also let you withdraw from the account and pay higher interest rates.

Online bank accounts are a better option because you can access the money quickly. Before opening your emergency fund, it’s essential to compare interest rates and other essential features from different financial service providers before making your choice.

How to Maintain Your Emergency Fund

The goal of an emergency fund is to set aside money for unexpected emergencies. Your goal should be to arrive at a specific amount at a specific time. Remember you should never withdraw this money unless you have an emergency.

Also, anytime you withdraw money from this account, it’s essential to start rebuilding it immediately since you don’t know what may happen in the future. The best time to start an emergency fund is today. If you had an emergency today —for example, you lost your income or job— how long would you live without financial stress?

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Open an Emergency Fund Today!

You now know the benefits of an emergency fund and how to open one. An emergency fund is a simple yet sound way of preparing for unanticipated needs in the future. Suppose you incur an unexpected financial emergency, but you have an emergency fund. In that case, you will not suffer the pain of taking a loan or using your credit card and incurring high-interest rates. In addition, accessing funds in an emergency fund is usually swift and easy.

At bills.com, we help you make sound financial decisions and build confidence to face the future. Our goal is to ensure you are ready to face the unexpected. Consult our experts today about opening an emergency fund and how much you should save depending on your income.

Ayhan Fletcher

"Subtly charming zombie nerd. Infuriatingly humble thinker. Twitter enthusiast. Hardcore web junkie."

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