The Importance of Establishing an Emergency Fund

by Washington Federal Team on February 9, 2012

When it comes to your financial well-being, it’s best to prepare for the unexpected. Costly emergencies can come at any time — from lost wages to out-of-pocket medical expenses. In this situation, the worst thing to do is to rely on credit, digging yourself into a ditch of debt. That’s why everyone should have an emergency fund.

What is an Emergency Fund?  

An emergency fund is an easily-accessible stash of money set aside specifically for true emergencies. Ideally, the emergency fund should equal six months worth of living expenses. It should not be used for expensive purchases, such as remodeling a bathroom or upgrading your television. Many people view an emergency fund as a pot of gold to raid at any time, which defeats the purpose of the account.

Getting Started 

Get started by opening a new savings account at your bank. Get into the habit of making regular deposits, or set up an automated draft from your paycheck.  If you’re on a tight budget, start with small, manageable sums. Gradually increase the amount you’re depositing, giving yourself time to adjust to each increase. Avoid carrying a credit card, or a debit card linked to your emergency fund account, in order to avoid temptation.

How Much is Enough? 

Studies show that Americans who have emergency funds are far less likely to accumulate debt. However, there’s no consensus on what qualifies as “enough.” This depends primarily on your lifestyle and level of financial responsibility. For instance, if you’re a single person without a mortgage, your emergency fund can contain considerably less than a married couple with two children and a monthly house payment. If you’re looking for a set goal or sum, aspire to save a year’s salary. Although this may take some time, this goal will keep you financially aware and give you peace of mind.

Where to Keep your Emergency Fund  

savings account is an easy place to start, because it’s simple to open and easy to manage. As your emergency fund gains value, you can consider other interest-bearing accounts that make your money work for you. Another option to consider is a money market account, which features flexibility and usually higher interest rates than traditional savings accounts. Certificates of deposit (CDs) require you to keep your money in the account for a specified amount of time, but earn a higher interest rate than other accounts. This option could prove cumbersome for short-term emergencies, but could help you save for larger emergencies in the future. Due to the unanticipated nature of a crisis, it’s best to keep at least a portion of your emergency funds in an account that’s easily accessible. Avoid placing this money in stocks or mutual funds, as the volatility of the market could cause you to lose the money you’ve worked so hard to save.

3 Keys to Successfully Building Your Emergency Fund  

1. Decide how large of a cushion you need: Consider your lifestyle and responsibilities when determining this figure.

2. Don’t Touch it:  The only way to successfully create an emergency fund is to pretend it’s not there. If you allow yourself to withdraw $100 dollars here and $20 there, pretty soon you’ll be back to square one, and completely unprepared for any impending emergency situations.

3. Put it in the right place: Make sure you have your emergency fund in a place where it can accrue interest.

For advice or to open your emergency fund account, contact Washington Federal today!

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