Build cash reserves that help you cover your bases while you build for the future
An emergency fund is the cornerstone of a strong financial foundation. When you have some cash stashed away, you can be ready for those unexpected expenses life throws your way, like a surprise car or home repair. Even something as unprecedented as the COVID-19 pandemic won’t feel as daunting when you’ve got some cash on hand to manage a short-term setback. Here’s how to help build enough emergency savings to cover day-to-day expenses while staying on track for future goals.
Keep emergency savings separate
An emergency fund should be held in a savings account earmarked only for unexpected financial challenges. Think of this account as a separate pool of just-in-case money for an urgent financial need — not as part of your strategic savings to cover big purchases or long-term goals like paying for kids’ college tuitions.
Decide how much to save
The amount of cash you need depends on your personal situation, such as how much you earn, the size of your family, your monthly bills, and other factors. One tip: Aim to put aside enough money to cover at least three to six months’ worth of expenses. Automatically depositing a small amount from each paycheck into your emergency fund can help make it easier to reach that goal.
Find the right place for that money
An emergency fund should be stable and liquid. Savings accounts or money market accounts are a good choice for emergency savings. Avoid accounts that have an early-withdrawal penalty like CDs or borrowing from your 401(k) or individual retirement account (IRA).
Know when to tap the funds
The name says it all: Emergency savings are only for unexpected, urgent expenses. This money is for paying your mortgage during a temporary loss of income or covering a big unexpected bill without going into debt. The idea is to move smoothly through these challenges while keeping yourself on track for longer-term financial goals.
Revisit and rebuild your reserves
Changes in your spending and other areas may change the amount you need in your emergency fund. Review your fund whenever there’s a change (or potential change) to your financial circumstances. For example, you’ll want to boost your emergency savings if you upgrade to a bigger house and have a larger mortgage payment. Or if you start to question your long-term job security. Building more of a buffer will give you peace of mind that you’re ready for whatever life brings. If you have to tap into those funds, you should shift your budget priorities to replenish those reserves.
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