Emergency Funds: What Are They and Why Do I Need One?
At Landmark, we’re constantly working to provide our members with products that help them save money for the things that really matter. Normally, we’re referring to having more money for things like buying a house, paying a child’s tuition or stashing money away for retirement. These are all important things to save for, but what about saving money for emergencies?
In a recent survey, only 39% of respondents said they could afford a $1,000 setback in their finances.* This means 61% of American households can’t cover the cost of an emergency that forced them to find $1000 in their savings accounts. This means that in many households an emergency could lead to financial difficulties.
What is an emergency fund?
An emergency fund is money set aside in a stable account, such as a high-yield savings account, short-term certificate deposit or money market, for unexpected costs.
You should only use your emergency fund for something that truly constitutes as an emergency. Real emergencies include:
- An unexpected visit to an emergency room
- Sudden unemployment
- Major vehicle and home repairs
No, spilling coffee on your favorite shoes or scratching your relatively new laptop is not an emergency. It is okay to fix or replace those items, but do so without tapping into your emergency fund.
Why do I need an emergency fund?
Mainly, so you don’t have to go into financial distress in an already stressful situation. Replacing your water heater in the dead of winter or having work done on your household’s primary vehicle can cause a little discomfort in your daily routine, but an emergency fund makes sure that discomfort doesn’t damage your financial situation. Instead of having to take out a hefty loan or max out credit cards to cover unexpected costs, you can fall back on your emergency fund without disrupting your finances or your peace of mind.
How much should I save?
This really depends on your financial situation, but saving anywhere between 3-6 months’ worth of living expenses can create a nice cushion for any potential emergency costs. Saving for even more time, roughly 8 months to a year, gives you an even bigger buffer so any potential hiccups don’t result in a financial meltdown.
How can I start saving?
A good place to start would be understanding how much money you would need to set aside in case of an emergency. From there, you can start setting aside money in an account designated for emergency funds. Small ways you can start throwing money into this account are:
- Keeping small change, such as $1 and $5 bills after a night
- Cutting out unnecessary expenses
- Supplementing your income with a side gig or selling items you no longer use
- Saving your tax refund
Even the smallest amount can help you build your emergency fund. What’s important is that you continue saving and you only use the money for true emergencies.