You know what they say about money? You can never have enough. But… you can have too little – especially if you face some unexpected situation, like losing your job during a recession, and you don’t have an emergency fund!
Unfortunately, that’s the reality for a lot of people. According to a 2022 report from Bankrate, less than half of Americans have enough money saved to cover an unexpected expense of $1,000. And, in our current economic downturn, that’s quite risky…
That’s why, in this guide, we want to show you how to start building an emergency fund. Our goal is to help you become financially prepared to get through any unexpected expense with less anxiety and without the need to go into crippling debt.
Specifically, we’ll discuss:
- What an emergency fund is
- Why it’s important for young adults to have savings for emergencies
- How much money should be in your emergency fund
- 3 easy steps to build an emergency fund for the first time
Let’s get started!
What Is an Emergency Fund?
An emergency fund is a savings account that you set aside for unexpected expenses, like a job loss, medical emergency, or car repairs.
For example, let’s say you unexpectedly lose your job. If you’re living paycheck to paycheck, you may have to put your rent or mortgage on a credit card, which would start accruing interest immediately. But if you have an emergency fund, you can cover your living expenses until you find a new job.
Why Is It Important for Young Adults to Have an Emergency Fund?
It’s important to have an emergency fund because it can help you avoid going into debt if you have a financial emergency. This is especially important during a recession when many people are out of work and struggling to make ends meet.
Having an emergency fund can also give you peace of mind as you enter adulthood. If you know you have some savings to fall back on, it can help reduce stress and anxiety about money. It can also help you avoid things like having to accept a horrible job just to pay the bills, go into credit card debt, or take out high-interest loans.
Here’s a great video from the Two Cents YouTube channel that drives home the point of why it’s important to have an emergency fund:
How Much Money Should You Have in an Emergency Fund?
The amount of money you should have in your emergency fund depends on your circumstances. Most experts recommend that you have three to six months’ worth of living expenses saved up. Your major living expenses include things like:
- Rent/Mortgage
- Groceries
- Insurance
- Healthcare
- Utilities
- Transportation
Three to six months of savings may seem like a lot — especially if you’re already strapped for cash. But remember that you can start small and build up your emergency fund over time.
If you are just starting, aim to save $500 to $1000 in your emergency fund over the next few months. Once you have reached this goal, you can start working on saving up three to six months’ worth of your living expenses.
3 Easy Steps to Build an Emergency Fund
Step 1 – Determine a realistic goal for your emergency fund
Start by looking at your monthly expenses and determining how much money you would need to cover these costs if you were to lose your job or have another emergency. Remember: your goal is to save at least three to six months’ worth of your living expenses.
Once you have a number in mind, you can start working on a budget and savings plan to reach this goal. For example, let’s say you realize that to have a three-month emergency fund will need to have at least $10,000.
How much would you need to deposit into your emergency each month to reach that goal in 12 months? What expenses can you cut back on to make reaching that goal more realistic?
Step 2 – Open a high-yield savings account
Now that you know how much you need to save for your emergency fund, it’s time to open a savings account specifically for this purpose. Why not just use a bank account you already have? Because you’ll be too easily tempted to spend that money on something else. You’ll be more likely to leave your emergency fund for emergencies only if you just put the money in a separate savings account.
The best savings account for this purpose will be a high-yield savings account that has no or low fees and offers a competitive interest rate. That way, your emergency fund will not only be easily accessible when you need it, but it will also grow over time.
To easily find and compare the best high-yield savings accounts, use this comparison tool from Fiona. Then select and open an online account that gives you the best offer. All of this can be done as soon as today!
Step 3 – Set up automatic deposits to your new savings account
Now that you have a savings account for your emergency fund, it’s time to start saving! The best way to do this is to set up automatic deposits from your checking account to your new savings account. This way, you’ll never even see the money in your checking account and you’ll be less tempted to spend it on something else.
To do this, all you need to do is log into your online checking account and set up an automatic monthly transfer to your new savings account. Ideally, you’ll set up transfers equal to the monthly savings goal you determined in step 1.
But, if that’s not possible for you right now, don’t worry. Set up deposits for whatever you can afford right now. Then, gradually increase that amount whenever you can. Every little bit counts!
Key Takeaways
An emergency fund is a crucial part of your financial security. When you have one, you can cover unexpected expenses without having to rely on credit cards or loans.
Ideally, you’ll save enough money to cover at least three to six months of living expenses. But, if that’s not possible right now, don’t worry. Just start with what you can afford and gradually increase your savings over time.
The best type of savings account for your emergency fund is a high-yield savings account. With this type of account, you’ll earn interest on your savings, which can help your emergency fund grow even faster. Click here to quickly find and open a high-yield savings account!
And if you’re looking for more tips to make and save money as a young adult, check out the rest of our blog. There we regularly share tips on topics like how to make an extra $500 a month and ways to save money in college!