Why you should have an emergency fund
When it comes to finances, it’s hard to feel like you’re ahead of the game. Many Americans are unprepared for an emergency. In fact, only 44% of Americans have at least $1,000 in savings for an emergency.1
When planning for your future and considering your long-term financial goals it’s important to make sure you’re covered for things that could pop up short term as well. Start with an emergency fund.
What is (and isn’t) an emergency fund?
An emergency fund is money you set aside to use only for unexpected financial emergencies, such as medical bills or a vehicle repair. It’s your first line of defense against unexpected events — and a key component of your financial strategy.
An emergency fund should be separate from your retirement fund. Your retirement savings are there for one thing: retirement. On average, people spend around 20 years in retirement, which means you need a nest egg that can help you throughout that lengthy period. If you start tapping into your retirement fund now, even in times of emergency, it could leave you short in retirement. Not to mention, early withdrawals may come with penalties.
Why do I need an emergency fund?
Hopefully financial emergencies are infrequent, but they do happen. Emergency funds protect you and your loved ones from the unexpected. Prioritizing protection can feel counterintuitive, especially if you have debt to pay off. People have the good intention of wanting to reduce their debt as quickly as possible, but what happens if you have a sudden, unexpected event? From job loss to natural disasters, a lot can be out of your control. In this case, there’s a good chance you’ll turn to credit cards or personal loans — and end up accumulating more debt. As a result, this sudden expense may have a much longer impact on your finances.
When you have your fund in place, try not to dip into it for everyday expenses or splurges. If you really do have to spend your emergency funds, make sure to replace them as soon as possible. While you deserve an occasional splurge and eliminating debt is important, building an emergency fund is critical; the good news is with careful budgeting, you’ll be able to do all three.
Your behavior makes a difference: Are you a spender or a saver?
Many people want to put savings aside, but their spending behavior doesn’t support this goal. According to our study, 50% of American workers said one of their top financial priorities is to build savings for any reason.2Yet, two-thirds of the same group said they are “spenders rather than savers,” reflecting the disconnect between people’s financial goals and their actions.3Additionally, 37% said they avoid dealing with their finances all together because it overwhelms them.4
How to start an emergency fund today
To start, set your savings goal. A round number like $500 can be a good first step, but after that, some professionals say you should aim to save six months of living expenses, or even one year’s worth of income. Alternatively, use extra income like a tax refund or a bonus as the beginning of your emergency fund. This money can be used to help with emergencies, saving you from going into debt.
Where to put an emergency fund
Put your emergency fund into a savings account. Savings accounts earn interest on the money you deposit and are protected by federal insurance up to $250,000. If you have consistent income, consider setting up an automatic deduction from your paycheck into your savings account. If your income is inconsistent, if you’re a freelancer for instance, set aside a certain percentage of everything that comes in. The minimum recommendation is 10% of your income, which can be increased over time as you become more comfortable with paying yourself first. The goal is to get in the habit of saving — and protecting your long-term financial health — so you can be prepared for whatever life may bring.
Taking it further
Think of your emergency fund as a financial oxygen mask: by putting your own financial protection first, you’ll be able to cover unplanned life events and take better care of those you love. Once you’ve established your emergency fund, the next step is to put layers of protection in place. Whole life insurance, a health savings account (HSA), and a balanced investment portfolio can all help prevent you from going into debt or taking on more debt.
Talk to a professional
Starting an emergency fund and preparing for your financial future can feel intimidating. Consider talking with a financial professional who can help you today.
Disclaimers:
1 56% of Americans can’t cover a $1,000 emergency expense with savings, CNBC, January 19, 2022
2 The Guardian Study of Financial and Emotional Confidence™, 2021
3Ibid
4Ibid
Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.
2023-163950 Exp. 11/25 *pre-approved content*
