Blog Post from July 2020.
Why you need an Emergency Fund
Due to recent events, i.e. COVID-19, I decided that having a $1,000 emergency fund while paying off debt was not enough. This year millions of people with secure jobs lost their jobs and had to file for unemployment. Imagine if that happened to you or myself and we had no savings or only $1,000. NOT GOOD right?
Earlier this year, I decided to fully fund my emergency fund.
I always tell my clients that they need at least $1,000 saved. While I do not think that is enough, its something. You gotta start somewhere. When working with me my clients, their first goal is always to build their emergency savings account to at least $1,000.
What is an emergency fund and why you need it?
An emergency fund is money that you place in an account for emergencies. These emergencies can consist of a flat tire, a deductible, home repairs or other unplanned car maintenance. Your emergency fund is your safety net to prevent you from drowning into debt due to an unexpected event.
You should be saving in a high-yield savings account. A high yield savings account is a bank account that often has a higher interest or APY (annual percentage yield) than your traditional savings account. It Is sometimes called a high Interest savings account.
There are many options for high yield savings accounts. Here are my top 5.
- Capital One
- CitBank
- PenFed
- BarClays
- American Express
How much should you save?
Well, $1,000 as I said is a great place to start if you have less than that. My advice is to have at least three months of essentials saved. Your essentials are rent/mortgage, food, transportation and utilities. Total those four expenses and multiply that total by 3. That amount is what you will need to cover your essentials for three months. Having a fully funded 3-month emergency fund is essential whether you’re single or married with or with out children. Remember, life happens and you need to be prepared for it.
It’s not if an emergency will happen, but when.
How do you begin saving?
Automatically. After you’ve determined your savings goal, and opened your new high yield savings account, you should setup automatic transfers to your new savings account.
I love the concept of your savings being out of sight and out of mind. My advice is to have your employer automatically deposit your savings into your emergency fund. Most employers allow you to direct deposit your paycheck into at least two accounts. Make your emergency savings one of them.
I hope you implement these tips and create an emergency fund for life’s unexpected events.
