What is the definition of an emergency fund?
An emergency fund is savings in a bank account for unexpected expenses like medical bills, car repairs, or home repairs. An emergency fund also can assist you in coping with a loss of income due to a job loss or prolonged illness. Using funds set aside for unexpected expenses can reduce the need for and costs associated with paying them with high-interest credit cards or bank loans.
Statistics on emergency funds
- More than half (51%) of individuals have less than 3 months’ savings stash in an emergency fund.
- If faced with an unexpected $1,000 expense, 40% will indeed pay it all with there own savings, compared to 20 % who would use a credit card, 15 % whom will pay it but would have to reduce other expenditure, 10 % who will borrow from friends or family, and 4 % who would take out a personal loan.
- Half of people feel very or somewhat comfortable with their emergency savings, while 48 percent are somewhat or very uncomfortable.
Why it’s crucial to have an emergency fund
A sound financial strategy should include an emergency reserve. You won’t have to take out any more high-interest loans or credit cards, and you’ll be able to cover any unforeseen needs.
To have a rainy day fund can provide you with comfort by guaranteeing you’ll have money in the event of an unexpected expense.
Without an emergency savings, your sole options may be to use credit cards, take out personal loans, or ask friends or family for money.
How much to save in your emergency fund ?
An rainy day fund should be enough to cover between three and six months of expenditures, but saving that much money takes time. Start with simple targets, such like saving $5 per day, to help you get started. Then gradually increase your funds to cover several months’ worth of expenses.
Your savings target will be determined by your income and expenditure. Make sure you have enough to cover your expenses rather than having to replace your entire income. Housing, utilities, transit, food, and credit or loan payments are all common monthly expenses.
To figure out the amount you require saving, add up your monthly expenses and multiply that sum by the number of months you wish to keep in hand.
Sole breadwinners, business owners, and those with varying incomes should save nine to twelve months’ worth of expenses in a fund.
Where should you keep your emergency fund?
An accessible high-yield savings account with a competitive interest is the best place to maintain your emergency cash. Find financial institutions that offer deposit insurance.
In comparison to brick-and-mortar banks, online-only banks often provide better returns and cheaper costs, making them attractive choices for emergency savings accounts. Comparing interests rates and accounts features is crucial because fees can significantly reduce the amount in your emergency fund.
