Life is certainly unpredictable! The best way to protect you and your family from financial hardship caused by unplanned expenses or financial emergencies is through a cash reserve known as an emergency fund.
What is an Emergency Fund?
An emergency fund is a cash resource typically held in a type of Savings Account, Money Market Account, or Term Share Certificate (or CD), designed to be leveraged in an unexpected event such as losing a job, an illness or medical emergency, or being confronted with another type of financial adversity.
One of the initial steps to developing an emergency fund involves determining how much money you should have tucked away. The most common approach to calculating how much you will need in your emergency fund is to review your monthly expenses. You should have a goal to save approximately 3-6 months of expenses in your savings account. To generate that figure, tally up your static monthly financial obligations, including the following.
- Monthly Rent or Mortgage Payments
- Utility Bills and Fuel Costs
- Groceries and Necessities
- Non-Essential Goods
- Auto Loans and Repair Expenses
- Home Maintenance and Repairs
- Insurance Coverage
- Dining Out and Other Leisure Spending
- Healthcare Costs
It’s also important to factor in seasonal heating and cooling costs. Take these expenses over the course of the year and divide them by 12 months to generate average monthly living expenses. Once you have added all of your monthly expenses, multiply that figure by 3-6 months to get your final emergency fund goal.
How Can I Build My Emergency Fund?
If you're living paycheck to paycheck, or just barely saving money for retirement and other goals, building a robust emergency fund may seem impossible. While it may be something of an uphill battle at first, employing a few savvy savings techniques can make the process easier. Here's how you can get started:
1: Create a Savings Goal
Identifying a target amount depends largely on your personal expenses, average income, and the potential cost of setbacks. Take for example, the difference between someone who carries health insurance that covers all their medical expenses versus someone with high deductibles. It’s crucial to factor in these and other unknown expenses when deciding how large of an emergency fund you might need.
After adding up your monthly expenses and finding your emergency fund goal, create a budget to help you determine how much you can save each month. Finding areas to trim your spending or ways to increase your income will help you contribute to your emergency fund each month.
Budgeting and managing your money has never been easier!
2: Look for an Account That Helps You Save
At first, you may think that an emergency fund must be limited to a single Savings Account. While many choose to open a basic savings account, you could select more than one savings option to help you balance interest rates with an account structure that works best for your needs. Here are some options to consider.
- Money Markets: These accounts offer you the chance to earn more on your savings, while still allowing access to your money when you need it! A Money Market Account at Peach State allows you to access your money up to six times monthly by check, electronic withdrawal, or transfer. While there is a minimum daily balance requirement, you can enjoy guaranteed returns as you watch your savings grow. You can also enjoy a higher percentage yield on your savings than you would with a traditional savings account.
- Term Share Certificates (or CDs): Commonly referred to as a “CD,” these savings options deliver guaranteed returns. At Peach State there is a low minimum deposit requirement of $1,000, so it won’t take much for you to invest in your future by opening a Term Share Certificate (or CD). While you must let your certificate reach its maturity date before you can take advantage of the return, there are different term options available to fit your needs.
- Traditional Savings Account: Savings Accounts offer 24/7 access to your account balances through Online and Mobile Banking allowing you to stay on top of your transactions and monitor how well you're doing towards your savings goals. Most savings accounts allow you to earn interest monthly, so be sure to do your research before you decide which account is right for your needs. At Peach State, your deposits are insured by the National Credit Union Share Insurance Fund for up to $250,000. Your accounts are also insured for up to an additional $750,000 with coverage by Excess Share Insurance Corporation (ESI), a licensed insurance company, for a combined coverage of up to $1,000,000.
3: Start Small
One of the more sustainable savings strategies is to ease into building an emergency fund. As long as there isn’t an imminent emergency, there’s no reason you can’t start by having a small percentage of your paycheck automatically deposited in a designated savings account. Once you’ve established the initial deposit, look at your monthly budget.
Consider evaluating and cutting non-essential expenses such as online gaming, streaming subscriptions, and gym membership that haven’t been used in ages. Funneling those funds into a long-term savings strategy will help grow your reserves faster. Over time, those cash reserves will provide the financial security you and your loved ones deserve.
4: Only Use it For True Emergencies
If there’s a single faux pas that upends someone’s emergency fund goals, it’s dipping into it for non-essential spending. What happens too often is that our spending habits get the best of us and the next thing you know, the cash reserves have been depleted. It’s critical to build and maintain a fund that can help you navigate hard times. The fact that the latest gaming system, fashion line, or discount cruise tickets are available won’t help when financial challenges arise. Remind yourself often that this money is untouchable.
5: Save More to Replenish The Funds Once Used
After a financial setback has occurred and you're back on your feet, it's essential to replenish your safety net. You may find it’s a lot easier to set aside funds once you can appreciate the value an emergency fund offers.
Peach State Can Help You Build Your Emergency Fund
If you're trying to build or establish an emergency fund, Peach State has the savings accounts, financial resources, and free budget templates you need to get started.
If you need help determining the best strategy for your unique financial situation, contact Peach State today. We're here to help!
Now that you know "What is an Emergency Fund," it is time to start saving! Download our free "3 Practical Budget Templates That Actually Work!" Guide to find potential savings in your budget.
