Your mind is at peace when you have already kept a specific amount for emergency expenditures like a car repair or a health hazard.
I know, it’s easy to say that one should have an emergency fund for various kinds of unforeseen expenses. But the actual job is tough, very tough.
Around 64% of millennials give top priority to emergency savings accounts. But the big question is, how much should they store in their emergency funds? What is the appropriate amount?
There is no definitive answer to this question. Much depends on an individual’s standard of living, income, and expenses. However, financial experts feel that individuals should save a minimum of $500 in an emergency fund.
How much should you save?
Like I said before, the beginner emergency fund should consist of at least $500. You should try to save between 3 to 6 months of expenses in your rainy day fund. Gradually, as years pass by, you can save a year or more of your income.
There are a few points to consider when you’re saving money in your emergency fund. For instance, the number of members in your family, the number of cars you have, and your job security. There is yet another thing you should consider, and that is your home.
Do you live in a rental apartment or own home. If you live in your own home, then you have to save money for home renovation or other issues like water leakage.
Deciding the correct amount to budget for an emergency fund will vary from a person to person. An attorney may not have to live on a tight budget to build an emergency fund. But a single mom with a meager income has to follow a shoe-string budget to save for an emergency fund.
Irrespective of your profession, try to set aside at least 5% to 10% of your paycheck till you save at least 3-6 months’ worth of expenditures.
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Where should you save?
Once you have figured out the amount you need to save in the emergency fund, your next concern should be regarding where to save the money. You can keep 2 months’ worth of expenditures in a checking account. Put 2 months’ to 6 months’ expenses in a savings account. Keep the rest of the amount i.e, 6 to 12 months’ of expenses in rolling CDs on the basis of the current interest rate.
Right now, the current interest rate on rolling CDs is low. Needless to say, most people keep money in the money market account or a savings account.
A word of wisdom
Never mess with your emergency fund because you need it during hard times.
Keep your money at a place that is not exposed to risk. Make sure your principal is safe and secure. There is yet another point that you should keep in mind, and that is you should be able to access the money whenever you want. Don’t keep your money in the stock market since it’s extremely volatile. You can end up losing your entire fund.
I know it’s tough to find the best bank for keeping your emergency fund. Usually, online banks give high-interest rates. But don’t get swayed by the high-interest rates. Your main focus should be saving money. Choose a bank that helps you to meet your saving goals.
Once you have saved a decent amount in your emergency fund, you can redirect a certain amount toward your other financial milestones. For instance, you can put 30% of the money in your retirement savings fund, and you can use another 30% of the amount for paying off debts. Both are important financial goals. A retirement savings fund helps you to secure the golden years of your life whereas when you pay off debts, you get a chance to reduce your financial anxiety. You get an opportunity to improve your credit score gradually and uplift your overall financial life.
How should you use an emergency fund?
In plain and simple terms, you should use this fund only during an emergency. Now the question is, what constitutes an emergency? An emergency situation can be anything. It can be when you have a car accident and have to pay for the car repair. It can also be when you lose your job and have to run a family for several months without any monthly income.
Apart from the aforementioned situations, you can use an emergency fund when you’re in debt. You can use the funds accumulated in the emergency fund to pay back your creditors. Explore all the getting out of debt options and find out which one helps you to save the most on your debts. Select the get out of debt option that suits your financial situation, and then use your emergency fund to repay all the bills.
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