Why An Emergency Fund Matters And How To Get Started

Financial emergencies like car troubles, job layoffs, medical bills or sudden home repairs are hard to predict and could hurt you financially. If you’re not prepared to handle these events, you may have to make sacrifices and incur unnecessary debt. Creating an emergency savings account early on can help protect yourself and your financial wellbeing when events like this happen. Creating an emergency fund may sound difficult to do, but it’s easier than you think. There are plenty of different routes you can take. Let’s break down what an emergency fund is and a few strategies or places to start so you can feel confident in your ability to save.

Key Takeaways:

1. An emergency savings can provide a necessary safety net.
2. Moving around your savings for emergencies can be easier than you think.
3. Don’t wait! The sooner you start your fund the better off you’ll be.

 

 

What is an Emergency Fund?

An emergency fund, or backup savings, is a lump sum of cash set aside to cover any sudden expenses or financial emergencies. Things happen, and when you need cash quickly an emergency fund can keep you afloat for a few months. Most experts say you should have three to six months’ worth of living expenses in your emergency fund. These funds can be in any type of account you feel comfortable with, as long as you have easy access to that account. Pick from a basic savings, checking or even a money market to hold your funds. You can use Landmark as your ideal credit union for any of these account types.

 

What’s an Emergency Expense?

While some emergency expenses may be obvious, like a burst pipe in your home or sudden job loss, other expenses can fall into a gray area. Simply put, the reason you may dip into your backup savings account is up to you. Hopefully, every day expenses won't require you to draw from your emergency funds. On the other hand, if your budget is tight and you don't have enough money for groceries, that may require using some emergency funds. Things like monthly medical bills, gifts during the holidays, childcare or other non-urgent expenses should be paid for using your regular savings or checking account. If you haven’t already, be sure to create a monthly budget to help you allocate your savings over time. You can learn more about starting a budget or managing your finances with one of our helpful online courses!
 

How Do I Set Up an Emergency Fund?

Now that you have an idea of what an emergency fund is, and what types of expenses fall under it, let’s go over creating an account. Start by setting a simple goal and build from there. If this is a new venture for you, try setting a goal of $1,000. If you take $100 from a weekly paycheck, you can reach that goal in roughly two and a half months! The amount that you need in an emergency fund depends on your situation. Think about costly scenarios or unexpected expenses that you have had in the past. You can use these scenarios to set a baseline for how much you may need to set aside. As mentioned before, most experts suggest having three to six months’ worth of living expenses in your savings or emergency fund.

 

How Do I Grow My Emergency Fund?

Starting an emergency fund, or any savings for that matter, doesn’t have to be difficult. Many different strategies can help you along the way. Certain methods require larger goal setting while others use the help of friends and family to keep you on track. Some simple ways to put money aside include:

• Managing your cash flow from consistent income and taking out a percentage from every paycheck
• Taking cash from a birthday card or special event and putting it into a savings
• Putting a portion of your tax refund away every year

Make reaching your savings goals easier! Break down your savings capabilities by using our savings goal calculator.
 

Unique budgeting strategies

Let’s look into some budgeting strategies that can help you maximize your emergency savings. If you're a Landmark member and want more tips, login to Digital Banking and navigate to the financial wellness section where you can set financial goals, track your spending and get a personalized financial scorecard.

 

Loud Budgeting

Sometimes talking about your finances and speaking up about your budget is the best way to start saving. Loud budgeting attempts to normalize living within your means and focuses on boundary-setting and communication for your current financial situation. The goal is to speak up about what you can and cannot afford, and to hold yourself accountable for your savings goals. Additionally, it’s a great way to combat money shaming and informs your peers you’re living within a budget.

 

50-30-20 Rule

This strategy involves splitting your income across three categories. Break out your money into 50% for needs, 30% for wants and 20% for savings or paying off debt. The first 50% bucket helps you pay for things like a mortgage, groceries, utility bills etc. The 30% bucket is for special "wants" for your everyday life. You may not need a new office chair or a night out with friends, but it is perfectly fine to want and expense things like that. Lastly, the 20% you take out can be used to pay off some outstanding debts or added to your emergency fund!

This method is perfect for those who need a consistent budgeting strategy but don’t need to worry where every dollar goes. It may not be good for those with changing expenses like contract workers or growing families with new medical bills and changing school expenses. The way you divvy up your funds in this strategy are up to your discretion. Some individuals may feel certain “needs” belong in the “wants” category or vice versa. However, it’s important to stay consistent with your categories. Swapping expenses from bucket to bucket is not ideal and can ultimately defeat the purpose of the budget.

 

Family or Household Budgeting

This strategy involves using more than your personal income or goals. As the name implies, this plan uses your household’s incoming money over a period of time to save for specific goals or monthly expenses. This method is great for people with joint accounts or those who rely on a combined income to pay off bills. Additionally, it’s an easier strategy if you’re just starting out, because you can consistently talk about it with others along the way. Begin by figuring out where you are financially and estimate where you want to be based on your average expenses. At this point you can use other budgeting strategies, like the ones above, to reach your goals. This also helps to keep your family budget top of mind and put away funds over time.

 

Automatic Saving Deposits or Transfers

A simple way to put money aside without having to go over your personal finances every month would be through automatic deposits or transfers. Most jobs offer the ability for their employees to break up their direct deposits into multiple accounts. If your job allows you to take a percentage of each paycheck and move it to another account, why not take a small portion like 10%, and funnel it to an emergency savings. If your job doesn't offer this, you could always use your personal banking system like, Landmark Digital Banking, to set up monthly automatic transfers. As an example, at the end of every month you could have $150 automatically moved from your primary checking or savings to a separate account. This allows for an out of sight and out of mind mentality for saving.
 

Three Ways Emergency Funds Help

An emergency fund can provide stability in a time of uncertainty. Here are three ways an emergency fund can help you in the long run:
 

1. Reduces the Likelihood of Going into Debt

This is one of the most important reasons to have an emergency fund. You can avoid relying on high-interest debt options, like using a credit card for more than you can pay back or pulling from your retirement fund earlier than recommended. High-interest fees and penalties from accounts or lines of credit like these can put the future of your finances at risk, and you should avoid using or taking from them whenever possible.

 

2. Improves Financial Decision Making

Setting your cash aside in a separate account that you use won’t use as often, could lower the chances of your money being spent in non-emergency situations. Simply put, having money out of your immediate reach can make you less likely to spend it on a whim. Having money out of your immediate reach can make you less likely to spend it on a whim. Plus, when you start making consistent deposits into a separate account it promotes a healthy financial habit. After seeing your emergency account grow month over month, you may feel more confident to save in different ways like with an IRA or certificate.

 

3. Provides Peace of Mind

If you worry about financial stability, you’re not alone. According to a 2024 Bankrate survey 47% of U.S adults said money has a negative impact on their mental health and causes further stress. If fears about getting hit with a large, unexpected expense keep you up at night, an emergency fund can give you confidence to take on life’s unexpected events. If you are looking for ways to start your emergency fund, we can help you out! We have savings, certificate and money market accounts designed to help you fast-track your goals. Learn more about all our savings offerings here.

 

The Bottom Line

Sometimes life and finances can change in a flash. Plan for the future by starting a reserve savings account. Events like unemployment, sudden car repairs, medical emergencies, property damage or even legal issues can cause temporary panic. With an emergency fund you can put your mind at ease rather than worrying about finding the money to handle these difficult situations.