Sarah Bilyeu, SVP, Business Development & Community Relations, San Diego County Credit Union
Would you be able to cover the costs of an emergency in your life? From hospital visits to car repairs, unexpected expenses can throw a real wrench in your finances. According to the U.S. Federal Reserve System, around 40% of American adults are unable to cover a $400 emergency expense.
An emergency fund is a dedicated account set aside to cover unexpected financial problems, such as a job layoff, medical expense, or home/auto repair. The main purpose is to make sure you feel comfortable and secure with your finances by having a safety net of funds that can be used to meet emergency costs. Additionally, an emergency fund can limit the need for you to use high-interest debt options, such as loans and credit cards, since you will be pulling money directly from your dedicated account.
Here are a few tips from San Diego County Credit Union to help you get started:
1. Be prepared
Don’t let yourself get stuck in a situation that stops you from being financially successful. Having money set aside can help you handle unexpected costs when they happen without having to skip other bills or borrow money. Not having to rely on credit cards or other types of loans will end up saving you money on interest and won’t let you fall behind on other vital expenses.
2. Make Saving Easy
A great way to save money to your emergency fund is to automate a set amount from your paycheck to go directly into a savings account. Be sure to keep these savings in an account that you can easily access at a moment’s notice.
3. Leverage what you already have
Starting an emergency fund savings plan can be tough, especially if you feel like your paycheck is already spent before you even get it. Take advantage of the money that has already come out of your paycheck by saving at least 25% of your tax return. With tax returns averaging a couple thousand dollars, it could be a big help down the road when an emergency occurs.
4. Make a plan
Think about the bills you have due and the order of importance. Weigh the risks of falling behind on one or more bills. Having an emergency fund will help pay the important bills like a mortgage if something happens like the loss of a job.
5. Keep it going
It is easy to spend money when you have it. Make sure you keep this emergency savings fund even if you do not think you will need it. You never know what life can throw your way when you are not expecting it, so it is a great idea to maintain this safety net.
Another important question we often hear is focused around the amount you should have in your emergency fund. It is recommended to have at least three months of living expenses in this dedicated savings account. Depending on your lifestyle and current expenses, you want to make sure you can cover living expenses like rent, utilities, food and gas. Additionally, if you have other people who depend on you financially like a child, parent or spouse, it’s recommended that your emergency fund be six months’ worth of living expenses. For a more accurate estimate, use our emergency fund calculator to see how much you should ideally save.