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Easy Steps To Emergency Fund

Writer's picture: Mike V.Mike V.




Many Americans lack even a small amount of savings to help them through an emergency. 4 in 10 adults said they wouldn't be able to cover a $400 emergency expense without having to borrow the money or sell something.


How to Set Your Savings Goal


Financial experts recommend that individuals have an emergency fund large enough to cover three to six months of their essential expenses. That amount will typically meet most recurring bills, such as those for housing, groceries, utilities, and student loan payments.


Retirees, especially, may need a sizable emergency fund. If you're relying mainly on Social Security income, you should have three to six months of cash. Those tapping retirement portfolios for income may need a year's worth of cash in their 401(k) or IRA accounts. That way, you can avoid having to sell investments during a market downturn or for medical emergencies.


How to Get There


Relax: You don't have to come up with that amount right away.


1) Set a timetable. Expect that it will take awhile to build a large rainy day fund. By accumulating smaller amounts to start, you'll go a long way toward reducing your financial risk.


Let’s say your essential living expenses come to $2,000 per month. If you can start building your emergency fund by putting away $100 a week, you’ll amass about $6,000 in a year and three months, assuming you earn 2 percent on that money.

If it’s going to take longer than that to build a sufficient emergency fund, look for ways to speed up the process, such as saving any windfalls or raises, or cutting back on discretionary expenses.


2) Choose the best place for your cash. Stick with savings and money market accounts for your rainy day fund. That way your cash is at least earning interest, and you can access the money without paying a penalty.


It's also important to keep your rainy day account separate from your regular checking account. Otherwise, it will be too easy to dip into that money for discretionary spending, like a vacation.


3) While building emergency savings should be a priority, you may have other urgent financial obligations, such as high-interest credit card debt. The average U.S. household with credit card debt has an estimated $6,929 in revolving balances, interest rate hovering at 17.7%, letting that debt build could wipe out the benefit of your emergency savings. Funneling some of your savings dollars toward paying off high-interest debt, with the rest going toward your emergency fund. The most important thing is consistency and commitment.


4) To ensure that you really build that emergency fund, set up a direct deposit so that a set amount of money from your paycheck is sent directly into your rainy day account. That way, you don't have to remember to move it yourself each month. This set-it-and-forget it approach reduces the temptation to spend those funds on splurges.

If you're faced with an emergency, having those savings available to tap will be invaluable.



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