Thinking about starting your debt-free journey? Funding your emergency fund is one of the first steps towards financial freedom.
What’s an emergency fund?
An emergency fund is a money set aside specifically for unplanned expenses that could potentially keep you in debt and further away from achieving financial freedom. These expenses include:
A medical emergency.
Unexpected home repairs
Unexpected car repairs
How much money should you have in an emergency fund?
Your emergency fund should be able to cover, three to six months’ worth of your monthly expenses in a money market or high yield savings account. I can see you feeling overwhelmed about the amount you need to come up with but let me just tell you something. Building your emergency fund takes time. Focus on small steps and most importantly in create the habit to save money.
Why is an emergency fund so important?
Having your emergency fund is a great start towards planning for a solid financial plan. This money will allow you to not have to rely on high-interest credit cards and keep you from having to borrow money at a high-interest rate.
Here is how I came up with the total amount I needed for my emergency fund*:
• Mortage/rent $950.00
• Electricity $75.00
• Food $300.00
• Health insurance $275.00
• Car payment $225.00
• Car insurance $72.00
*These numbers are just an example and do not reflect my actual numbers.
Multiply your total by either three or six months; in this example, I will need—$ 5,481 for three months or $11,022 for six months.
3. Where to keep your emergency fund?
This was the part that was the most challenging for me because everyone online was suggesting Ally Bank I did some research online and they have great reviews, in fact, Money Maganize named them, “Best Online Bank 2020-2021.” But I decided to go with a local credit union I’ve done business with for many years.
The moral of the story, don’t overthink it, just get the account open and rename this account Emergency Fund Only this will keep you from dipping into your savings. If you know you are going to “borrow” money from your emergency fund, I suggest using a bank separate from your primary bank.
If you are serious about becoming an investor, having an emergency fund will help you stay away from relying on credit and allow you to invest stress-free.