Financially Prepare for 2024: Learn How to Set Up an Emergency Fund
Published January 10, 2024
If your car broke down tomorrow, would you be able to pay out-of-pocket for repairs? According to the Federal Reserve, only 62 percent of Americans would be able to cover a $400 emergency.
Building a stable emergency fund and implementing a saving strategy are the most effective ways to prepare for whatever life might throw at you. With over 60 percent of adults living paycheck to paycheck, saving money for unexpected financial hardships prevents added stress and debt. In this guide, we will cover what an emergency fund is, how much money to save, where to keep your savings, and how to reach your savings target.
What is an Emergency Fund?
An emergency fund is a cash reserve that is set aside for unplanned expenses. The fund can be used for car issues, job or income loss, medical expenses, home repairs, and any other financial burdens that may arise. Prevent yourself from going into debt by saving up for when you need the money most. In order to cover these emergencies, your goal for this fund should be a minimum of three to six months’ worth of expenses. When calculating your minimum target, here are expenses to factor in:
- Monthly rent/mortgage payment
- Average utilities bill
- Transportation costs (car payment, gas, or public transportation)
- Debt payments (minimum credit card bill or other loans)
- Insurance (health or car)
- Cellphone bill
Your emergency fund should be used for essentials only. When drafting your budget, remove unnecessary budget items including shopping, travel, subscriptions, beauty, entertainment, and dining out.
A simpler way to calculate how much money to save for your emergency fund is to divide your post-tax salary by 12 months. For example, if your post-tax monthly income was $3,042, multiply by three to get $9,126 as a target savings goal for a three-month emergency fund.
Where to Keep Your Emergency Fund
With the national average savings account interest rate at 0.46 percent, it can be highly effective to place your emergency fund into an account that will have a greater return. A few options include a high yield savings account, certificates of deposit (CD), a traditional bank account, or a money market account. Visit our savings page to learn more about WMCU’s various savings options.
How to Reach Your Savings Goals
Once you have chosen a location to house your emergency fund and have made an initial deposit, making reoccurring payments to your fund will create a strong foundation for reaching your savings aspirations. Budget a portion of your income and contribute to your account weekly, bi-weekly, or monthly. Allocating 10 to 20 percent of your monthly income towards your emergency fund is ideal, to help you reach your three to six months saving mark.
Monitoring your progress frequently will allow you to set goals and keep track of your savings. Work towards increasing your emergency fund by sticking to a budget, reducing impulse spending, and using Debit Card Round Up. Learn more ways of increasing your savings with these seven attainable financial New Year’s resolutions.
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