The Importance, The Basics, and The Emergency Fund Calculator Tool

The importance of emergency funds includes the ability to meet basic needs in the event of an unforeseen life event, such as a job loss. It’s also necessary to consider other aspects such as continuation of lifestyle, protecting wealth, avoiding debt and more.

Don’t be thrown off by life’s unexpected expenses

You likely have measures in place in the event of an emergency, because it’s no secret that things go wrong from time to time. Preventing emergencies from happening is next to impossible, but having a financial plan in place so they don’t derail your lifestyle doesn’t have to be.

An emergency fund is a safety net, and while it won’t prevent emergencies from happening, it can certainly provide financial stability and peace of mind in a time when you need it the most. And by planning accordingly, you’ll understand that establishing and growing your emergency fund can be a simple process.

The basics

Emergencies come in all shapes and sizes. You’re familiar with common examples, such as physical accidents that impact health, or perhaps a vehicle breakdown that could cost a great deal of money to repair. But there are many examples of emergencies that might not be so top-of-mind.

Essentially, if you’re not financially prepared for an unforeseen situation , it could be considered an emergency. For instance, if you lose your job and need money to keep the lights on, this is an emergency. Or perhaps your spouse loses a job. If the two of you share living costs, this means you’re now taking on additional payments you weren’t planning on; and depending on your amount of accessible funds, or the status of your budget, this could also be an emergency.

Consider what happened to many individuals and businesses as a result of the COVID-19 pandemic, as an example. This was not an emergency that anyone could have planned for, but there’s no question that those who had a strong financial plan in place likely did not feel its impacts as harshly.

The bottom line is that emergencies are such because they’re unexpected. And waiting for them to reveal themselves is too late when it comes to establishing your financial plan.

Know yourself

You live life in your own way, and by default, your living expenses pertain to this lifestyle. Keep this in mind when planning your emergency fund savings account. For instance, are you rigid with your groceries and prepare each meal in your kitchen? Or are you one who likes to eat out and get coffees on the go?

The idea is that your emergency fund should be substantial enough to support your life the way you’re living it. Naturally, you’ll likely cut back on some spending should an emergency occur, but if you’ve saved properly and planned out your budgeting accordingly, you should be able to rely on your emergency fund and not have to sacrifice too much of the way you live.

Use it…for emergencies

It sounds redundant, but your emergency fund is only valuable to you if it’s there for when you need it. There are many sudden items or expenses that will pop up in your life from day to day, but are they truly an emergency?

An emergency is an expense that could set you back if not taken care of but has to be taken care of. For instance, an unexpected medical emergency needs to be addressed for the health and safety of whomever is involved, regardless of the cost. (And yes, this could include pets as well.)

If this cost is high, which is likely, and you don’t have your emergency fund in place, then you might have to rely on debt to take care of this situation. This is when emergencies start to impact the rest of your life, as now a new debt will have to be factored into your budget.

If you’re fortunate and no emergency befalls you, then you are in an even better financial position. You can grow your fund even more, but you can also start allocating that amount toward other savings vehicles or financial goals.

Make it accessible

If an emergency happens, you’ll likely need to access your funds right away. For this reason, you need to have your money in a savings account that allows you to withdraw at will. Having your money invested in a long-term savings vehicle might seem like a good way to generate growth, but if you can’t get these funds right away then it will not do you much good.

There are various types of savings accounts available that are worth considering. Ideally, you will want to check out a high-yield savings account, or other savings account with high interest potential.

Don’t wait

Do yourself a favor by establishing your emergency fund plan today. Take a look at your budget, consider your savings options, and protect yourself from financial fallout should something go wrong.

Help prepare for tomorrow’s unexpected emergencies by opening a savings account today.

What’s the right emergency fund amount?

A general rule is to try and have three to six months of living expenses in your emergency fund. Post pandemic, bankers and financial advisors are signaling six to nine months is the new recommended emergency fund. You won’t be able to achieve this overnight, and that’s fine. Just continue to chip away at it. Like all aspects of your life, your emergency fund is a work in progress, so be patient, but remain dedicated to its growth.

If you’re just starting your emergency fund, you might not be sure how much you should set aside. Or, even more commonly, you might not think you have enough extra money to set aside at all. Just take a step back. The fact that you are beginning with these questions is a good start.

Consider your personal financial situation—taking a close look at your budget before you do anything. Once you’re serious about setting money aside, you’ll no doubt find areas to trim back because you’ll make it a priority to do so.

Once you have a realistic amount that makes sense for your situation, the simplest approach is to automate your efforts so that you can set aside this amount from each of your paychecks. By streamlining your efforts in this way you won’t be tempted to spend the money on something else. Your emergency fund will grow bit by bit, and your confidence will grow along with it.

For additional information on starting an emergency fund, visit FINRA. And to set up a savings account with Associated Bank, schedule an appointment with a banker today or apply online today.

Sources:

Investopedia

“How to start (and build) an emergency fund,” Bankrate, December 2020

https://www.bankrate.com/banking/savings/starting-an-emergency-fund/

“Emergency Fund: What It Is and Why It Matters,” NerdWallet, December 2020

https://www.nerdwallet.com/article/banking/savings/emergency-fund-why-it-matters