Your Guide to Emergency Funds
Uncertainties are inevitable, so having a financial safety net can provide valuable stability when unexpected events or emergencies happen. Follow along to learn how to create and grow an emergency fund.
What Is an Emergency Fund?
An emergency fund, sometimes referred to as a “rainy day fund,” is a money reserve set aside specifically to cover unexpected expenses.
Why Is It Important to Have an Emergency Fund?
Emergency funds gives peace of mind that you’ll have money readily accessible for critical situations without disrupting your overall financial stability.
How Much Should I Have in an Emergency Fund?
The ideal amount in your emergency fund depends on your circumstances, including monthly expenses, financial responsibilities, and income. There is no one-size-fits-all answer, but a common guideline recommended by financial experts is to save three to six months' worth of living expenses in your emergency fund.
How to Build an Emergency Fund
Building an emergency fund requires planning, disciplined saving, and consistent effort. Here's a step-by-step guide to help you build your emergency fund:
- Step 1: Set a Savings Goal
Determine how much you want to save in your emergency fund, considering all your current expenses. - Step 2: Create a Budget
Considering your monthly income and expenses, identify areas where you can cut back or adjust to save for your emergency fund. - Step 3: Automate Savings
Set up an automatic transfer to a separate savings account dedicated to your emergency fund. Treating this transfer as a non-negotiable bill helps ensure consistent contributions. Learn more about setting up automatic savings with KeyBank’s EasyUp. - Step 4: Start Small
If saving the full recommended amount seems overwhelming, start with smaller contributions. The key is to establish the habit of regular saving, even if it's a modest amount at first. - Step 5: Cut Unnecessary Expenses
Identify discretionary spending to reduce or eliminate it and redirect those funds to your emergency fund. Visit KeyBank’s 50/30/20 budgeting tips to determine your wants versus needs. - Step 6: Use Extra Money Wisely
When you receive unexpected money such as tax refunds, work bonuses, or monetary gifts, consider allocating a portion or all of it to your emergency fund. - Step 7: Side Hustles or Part-Time Work
Explore opportunities to earn extra income through part-time work, freelancing, or gig economy jobs. Direct the earnings from these activities toward your emergency fund. - Step 8: Reduce Debt
Prioritize paying off high-interest debt while simultaneously saving for your emergency fund. Or even consider consolidating your debt into more manageable payments to help pay it down faster. - Step 9: Avoid Temptation
Keep your emergency fund separate from your regular spending accounts. This reduces the temptation to dip into it for non-emergencies. - Step 10: Stay Flexible
Life circumstances can change, and unexpected expenses may arise. If you need to use your emergency fund, replenish it as soon as possible. - Step 11: Celebrate Milestones
Celebrate your progress as you reach milestones along the way. This positive reinforcement can motivate you to continue building your emergency fund. Learn more about staying financially responsible while treating yourself.
Remember, building an emergency fund takes time and patience. Start where you can, and gradually work toward your goal. The peace of mind and financial security provided by having an emergency fund are well worth the effort.
Where to Keep Emergency Fund
Your emergency fund should be easily accessible and low-risk. Consider keeping it in a high-yield savings account or money market account.
When to Use an Emergency Fund
Financial emergencies can include medical bills, job loss, major car or home repairs, or other urgent situations that require immediate funding, such as owning a pet.