You probably can’t see the future—and life is full of surprises.
Whether it’s a car accident or a sudden job loss, an emergency fund is your personal safety net for when those surprises come with unexpected expenses.
What is an Emergency Fund?
An emergency fund is essentially a safeguard in place to cover unforeseen costs outside of your routine expenses. It’s a way to quickly access money in case of an emergency.
With emergency savings in place, you won’t be left scrambling to cover those costs or diverting funds away from other financial goals you’ve been saving towards. A savings account for emergencies can also help keep you from racking up interest-laden credit card debt when you’re in a pinch for extra funds.
Do I Really Need an Emergency Fund?
Beginning an emergency fund can seem difficult even in the best of times, and you might wonder if keeping a portion of your income held away for those “what-if” moments is worth it.
Seeing the value in an emergency fund begins with accepting that hard times fall on everyone—it’s not a question of “if” something happens, but a question of when.
And when hardships do come around, you’ll be grateful for the safety net an emergency fund can provide.
Some of the top reasons you might need an emergency fund include:
- A medical condition that racks up bills, maxes out your insurance deductible, and eats up your sick days
- You live far away from family and would have to travel last-minute for an emergency
- Home-ownership, in which case you are responsible for upkeep and repairs
- You’re self-employed or otherwise wouldn’t qualify to claim unemployment benefits
If the ongoing Covid-19 pandemic has taught us anything, it’s that the world can change in an instant. Having your own personal insurance in the form of an emergency fund can help keep you afloat when the abnormal becomes the new normal.
How Much Money Should Be in My Emergency Fund?
You’ve decided to start an emergency fund—but how much money are we talking about?
Well, that number is unique to you and your situation. A good starting place is to think of the biggest possible emergency that could happen to you and your family. For most people, this would be an unexpected job loss.
In your worst-case scenario, how much time would you need to recover your income stream? Creating a recovery timeline will help you narrow down your emergency fund goal.
To calculate your exact goal number, figure out how much money your family needs for the essentials each month, like rent, food, and transportation. You’ll want to multiply that number by your recovery timeline—we recommend at least 6 months.
A shortcut to consider if you don’t want to add up all your monthly essential costs is to multiply your monthly income by the months needed to recover your income stream (get a new job). A rule of thumb that some follow is to have 6 or more months of your salary saved up.
Now that you’ve calculated how much money you’ll need to save up for in case of an emergency, you can create a plan to start saving toward your goal.
Where Should I Keep My Emergency Fund?
Since emergencies can happen at any moment, you’ll need to keep your emergency savings in an easily accessible place. On the other hand, leaving that money in your checking account can make it harder to track while also tempting you to spend more than you want to.
So what’s the best place to keep your emergency fund to keep it liquid but separate from your spending accounts?
The good news is that you’ve got several options, including:
- High-yield savings accounts
- Money market accounts
- Certificates of deposit (CDs)
- Traditional bank accounts
- Roth IRA accounts – One note here: If you withdraw from your Roth IRA before it’s five years old, you may be subject to penalties. In addition, you can withdraw contributions at any time without penalty, but if you withdraw earnings, you may be subject to penalty. You can learn more about withdrawal rules here.
Each of these options have pros and cons, including varying liquidity, so explore all your options when looking for the best place to keep your emergency fund.
How Can I Start Building My Emergency Fund?
You know you need an emergency fund and you’ve got your savings target—what next?
Getting started can feel complicated. How much can you afford to save each month? How should you prioritize your emergency savings in relation to other financial goals? What happens when you reach your target number?
We keep it simple using the Lasso App. With Lasso, you can create a customized goal for building an emergency fund, using personalized strategies to plan, invest, and save towards your goals. Plus, you can also connect directly with experienced financial professionals to answer all of your questions.
With a user-friendly interface, Lasso allows you to set specific timelines and contributions to reach your goals. You can also use the app’s features to play around with your inputs and see how they would change your plan, or easily change your plan when the unexpected happens.
Ready, Set, Save
You may not be able to see the future—but with an emergency fund in place, you can be ready to take on whatever the future holds. Download the Lasso app to start building your emergency fund today.