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Saving for a Rainy Day: How to Start an Emergency Fund

Saving for a Rainy Day: How to Start an Emergency Fund

Building the foundation of your financial future can be a daunting task. There are so many hurdles and challenges that life can throw your way, and with those challenges often come financial uncertainty and stress. One of the best weapons to help you face these obstacles head-on is having an emergency fund. Whether you’ve been building your emergency fund for years or starting one for the first time, it’s important to know how to optimize your savings for a rainy day.

At Leaders Credit Union, we want to help you champion your financial future for every season you face. Whether you’ve just started college or have another baby on the way, we understand that establishing a strong emergency savings fund is essential for your financial well-being. We’ve created this blog to help you understand the benefits of having an emergency fund, so you can know how to better take care of your family’s needs.

What is an Emergency Fund?

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What It Is

An emergency fund is a designated pool of savings that is used exclusively for unexpected situations. These situations can vary in severity, ranging from a medical crisis to a minor home repair. Since these expenses are not planned, an emergency fund serves as a safety net for you. Ideally, it should provide up to 3-6 months of your living expenses. We’ll discuss later how this goal can vary depending on your current stage in life.

What It Isn't

It’s important to note here what isn’t an emergency fund. One of the most dangerous financial choices you can make is to use your credit card for emergencies. Depending on your credit card for unexpected expenses could create more problems by causing your debt and spending to increase, which will negatively impact your credit score. An emergency fund can help protect your credit score by preventing you from using credit or a loan to pay for overwhelming expenses.

Credit cards are never a reliable financial source if you’re in the middle of a financial emergency since credit card issuers could restrict or cancel your card. If this is a habit you’ve seemed to find yourself in, make sure to pay off any debt and re-allocate that money to an emergency fund savings account. Starting an emergency fund will prevent you from returning to a vicious debt cycle and financial stress.

What's the Difference Between a General Savings Account and an Emergency Fund?

Before we dive into how to start an emergency fund, let’s clarify the difference between an emergency fund and a general savings account. While the intended goal for both is to save money, the key distinction is that emergency funds are only used for one intended purpose – crisis situations. You can use a general savings account for a variety of reasons, such as your dream vacations, house appliances, or personal hobbies. An emergency fund is unique from these accounts because there should be more money being poured into the account than coming out. It’s best to see your emergency fund as virtually untouchable, and this mindset will lessen any temptation for you to spend more than you save. Accessing your emergency fund should be a last resort.

While you shouldn’t be wasting your emergency fund on non-critical spending, it is important to mention that you should be able to access it with ease. Having safeguards to keep you accountable is a plus, but making your emergency fund inaccessible is unhelpful and even risky. You want to be able to access your funds at any moment, especially since emergencies can happen in an instant. Don’t be afraid to use your funds when you really need them – that’s what they’re for!

Do I Need an Emergency Fund?

When beginning to think about an emergency fund, it is easy to brush off the idea and believe it’s not applicable to you. Maybe you don’t have any pressing medical issues or any major car troubles. Despite whatever financial hiccups you’ve faced, having emergency cash saved on the side can prevent a minor expense from escalating into a major financial burden.

Before pulling from your emergency fund, you need to make sure you clearly define what qualifies as an emergency. Here are examples of why an emergency fund could be useful for you:

  • Medical expenses arise with sudden health concerns. A trip to the emergency room or a broken bone could result in expensive medical bills.
  • Home repairs can accumulate as you try to fix leaking pipes, a broken dishwasher, or a fallen tree.
  • Car maintenance costs can add up quickly and unexpectedly with flat tires, accidents, and general safety upkeep.
  • A career change could cause a temporary loss or significant decrease in income.

Having an emergency fund can help ease your anxiety by providing you with a dependable back up plan for managing these types of unforeseen issues.

How Do I Start an Emergency Fund?

  1. Build a Budget.

Having a budget helps you to break down your monthly expenses, so you can have a better understanding of your personal finance needs. Since you’re keeping an eye on your saving and spending habits, you’ll be able to have insight to how much extra money you can set aside for emergency savings. It will also reveal unnecessary spending and begin to shift your mindset to be more cautious of your financial choices. Remember, you don’t have to dedicate all your money to an emergency fund at one time. Take the process step-by-step to make sure you can achieve your goal. To learn more about budgeting, be sure to check out our other article, Budgeting Basics: How to Establish a Personal Budget. Also, don’t miss out on our Smart Budgeting Tool Kit and Pocket Change Podcast to learn more financial planning tips.

  1. Choose a Savings Account.

Since an emergency fund is used exclusively for unplanned circumstances, it is important that you put your money into a savings account and not a checking account. Savings accounts typically have higher interest rates than checking accounts, and they provide a layer of accountability. You also won’t be as easily tempted to use your earnings on impulsive spending. At Leaders Credit Union, we have two different savings accounts that can help you accomplish your emergency fund goal.

  • The first account to consider is a high-yield savings account (HYSA). With an increased interest rate on these accounts, you can gain more as you save for your emergency fund. HYSAs are built to accelerate your savings, and they serve as a dependable resource for you to grow your financial stability. Leaders Credit Union offers a Forward Plus High-Yield Savings Account. 
  • Another option for your emergency savings fund is a Fast Forward Saving Account. If you put your savings into this account, you can also earn interest like a HYSA.  A key difference between this account and the HYSA is that there are tiered dividends with behavioral requirements to encourage savings. This could be a great choice for you if you’re new to money management and want accountability with your account.

How Much and Often Should I Be Depositing in My Emergency Fund?

Your budget and savings balances will determine how much money you will be dedicating to your emergency savings goal. It’s important to note that these goals vary from person to person. Here are a few components to consider when deciding on how much you’ll need to save:

  1. Your stage of life can cause how much you need to save for an emergency fund to vary drastically. If you’re a graduating high school student or in college, your emergency fund is going to look very different compared to someone who is employed full-time. As we’ve mentioned already, the ideal emergency fund covers 3-6 months expenses. If you’re a full-time employee or have a family, you're responsible for several major expenses, including mortgage payments, student loans, insurance, and medical bills. The more dependents you have in your household, the more your emergency fund should be able to cover their needs.

    Since students typically have fewer expenses overall, a more obtainable goal for an emergency fund would be 1-3 months. Some of the major spending concerns if you’re a student are car repairs, textbooks, tuition fees, and back-and-forth travel to your hometown. While some students work full-time throughout college, most work only part-time or not at all. It’s important to adjust your emergency fund as needed so you can be financially ready for the next season in your life.

  2. Owning a home compared to renting an apartment or a townhouse can have a huge contrast in costs. While homeownership is a long-term investment, there are many extra expenses that come with taking care of a house. These could be property taxes, lawn care, and general repairs. Most landlords handle these payments, so you wouldn’t have to account for these concerns in your emergency fund if you’re a renter.

  3. Employment status plays a crucial role in your financial planning. If you’re employed, the recommended savings is 3-6 months. However, if you are contracted or self-employed, it is better to have 6-8 months saved since there is more variation in income.

  4. Insurance coverage is also a key variable for knowing how much to save. For example, a high-deductible healthcare plan will require you to pay less per month than a comprehensive healthcare plan. It is helpful to know how much you’ll have to pay out-of-pocket in case of medical emergencies.

  5. Location isn’t something you may often think about, but where you live can impact how much you need in your emergency fund depending on the financial and environmental climate. Variations in taxes and weather patterns play a huge role in how prepared you’ll be. If you live in a high-risk area for tornados or hurricanes, you should take into consideration how that could impact you financially.

As you ponder what elements could affect your emergency fund, be sure to keep in mind that you’ll need to re-assess your funds as needed. For example, adjustments will need to be made for major life events like a pregnancy, marriage, or retirement. Maintaining your monthly budget will help you stay on track for whatever financial needs you might have.

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Build Your Emergency Fund with Leaders Credit Union

We want to re-emphasize that everyone needs to have an emergency fund. Even if you’re financially healthy or have no debt, it is better to be proactive than reactive when a crisis arises. No one is exempt from the unforeseen circumstances that life throws our way, and it is our responsibility to be as financially prepared as possible.

Are you wanting to grow your emergency savings fund? Leaders Credit Union is ready to help you be prepared and build financial stability. Become a member today and learn more about our savings accounts.

1. - APY = Annual Percentage Yield. Not all accountholders will qualify and eligibility criteria may apply. For full disclosures, please access our Rates Disclosures for consumers or business.