When it comes to financial wellness, planning is important in order to manage the ups and downs we face in life. Financial wellness describes the state of your personal finances. This includes the amount you have in savings, how much you’re putting away for retirement, and how much you spend on fixed and non-essential things. In short, your level of financial wellness shows your ability to pay for things now and later, expected or not.

What is an emergency fund and why should I have one?

An emergency fund is money you set aside so you can access it when an unexpected expense or loss of income occurs. The emergency fund can help you get by for a few months if you’re laid off or if you need to pay for a big repair on your car. Having money for an emergency not only helps pay for expenses, but also provides benefits before a crisis happens. For example, an emergency fund can help you:

Stress less – Being prepared can give you confidence that you can handle any of life's unexpected events. Knowing the funds are available can help you avoid the stress and anxiety of wondering what you would do if something unexpected occurs.
Avoid debt – No one wants to spend more on something than they need to. With your emergency fund ready, you won’t have to borrow, take a loan or use a credit card to pay for the problem. This helps you avoid fees, penalties, interest and more debt.
Monitor your spending habits – Knowing where your money is going is another one of the first steps to financial wellness. By figuring out how much you can afford to put into an emergency plan, you’ll be two steps ahead.

How much money should be in my fund?

Experts recommend aiming for an amount equal to 3 to 6 months of your salary. This length of time is recommended because the most common reason for an emergency is the loss of income. If you or your partner loses a job, it may take several months to find a new one. And you still need to pay the bills in the meantime.

But keep in mind that this amount is only the ideal end-goal. It’s what you might want to work toward over the course of months or even years. You can start with whatever amount you’re comfortable with.

But I can’t afford an emergency fund!

Small changes can lead to big benefits, and financial experts urge that starting is the most important part. Any step toward building an emergency fund is better than waiting or doing nothing.

Step 1: Develop your plan

Where you put the money matters. Start a savings account with a high interest rate. The account should be separate from the regular bank account you use daily, so you’re not tempted to use it. Consider an interest-bearing savings or money market account. These accounts can have a higher interest rate compared to a basic savings account with low to no interest rate, which means your money will start to make money. It also means that while you can access the money, it will take a little more effort. Hopefully this reduces the impulse to use the funds.

What you save each time is up to you. Figure out your monthly expenses to see what you can put into the fund. You can add to it daily, weekly or monthly – whatever works best for you. You can even “practice” for a while by adding $1.00 a couple times. If that feels OK, practice with $2.00 and so on. When you hit an amount that you like, keep it there.

How you save the money is just as important as how much. Don’t leave it up to chance. Find a good way to get the funds into the account on a regular basis. Here are a few tips:

Set it and forget it: Have money deposited automatically from each paycheck into a savings account. The theory is that you’ll never see it and might not miss it.
Pay yourself: Set your bank account to automatically move money into a savings account each month or week. If this feels uncomfortable, you can go back to practicing.
Hands off: Using an app or other money management program can help. They offer things like rounding up purchases and automatically depositing the change into your saving account.

Step 2: Stick with it

Once you’ve set up your plan, start thinking long-term. What is your long-term goal? One month of expenses, $100 or $2,000? It’s up to you to decide what to work toward. Remember that you can always adjust your goal. It’s also a good idea to evaluate your plan regularly.

Be patient and persistent. Once you start, you may be able to save money faster than you think. The key is to start now, have a plan and stay committed so the funds are there when you really need them.

Sources

Consumer Financial Protection Bureau. Accessed January 12, 2024. An essential guide to building an emergency fund.

National Financial Educators Council. Accessed January 12, 2024. Financial wellness definition.

Creating an Emergency Fund

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