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An emergency fund is a crucial addition to your finances at any time, but it’s especially important nowadays.
With 72% of economists predicting another recession coming down the pike, you may need some extra help riding out the next year or so with confidence.
If you don’t have an emergency fund — or think yours needs a boost — here are five tips to help you be prepared.
1. Set an Appropriate Goal
The golden rule of emergency funds is saving between three to six months of living expenses.
That should include everything from your typical housing costs to groceries, transportation, and entertainment. This way, if something big interrupts your ability to work, you’ll still be able to carry on as normal for up to six months.
With a recession looming, some financial advisors recommend upping your goal to cover a full year’s worth of expenses. This goal provides an ample safety net, ready to catch you if you lose your job.
A 12-month fund provides the greatest financial security, but let’s face it — it can be challenging to save that much.
It’s up to you to decide whether you need to save up a year’s worth of expenses or if you’re good with just three.
Consider your risk tolerance, family situation, and income to find the right goal for you.
2. Don’t Touch It Except in Emergencies
With the word “emergency” in its name, it may come as no surprise your emergency fund is for unexpected, urgent, and serious expenses you can’t afford on your own.
However, when you have six months of living expenses sitting in an account somewhere, it can be tempting to use some of it on things that don’t quite fit this definition when life is good.
But tapping into this fund to cover expected household maintenance or a much-needed vacation can get you into trouble. It drains your savings and leaves you vulnerable when a real emergency comes along.
If you’re finding it hard to resist the temptation, consider moving your savings to an account that isn’t connected to your checking account.
By keeping your emergency fund with a financial institution separate from the one you usually do your daily banking with, it’s harder to access this money on a whim.
3. Always Refill It After Using It
While you can cross all your fingers and toes that an emergency doesn’t come your way, it’s only a matter of time before the unexpected arrives.
The good news is that you’ll have some spare cash to cover your emergency if you’ve made regular contributions.
But if you expect it to help you again, you’ll have to redouble your efforts to refill your fund. Getting your fund back to its normal levels after a crisis is critical — otherwise, it might not provide a safety net in the next emergency.
If you’re unlucky, an emergency will arrive faster than you can replenish your savings. If you have to pay an expense right away, consider borrowing money carefully.
You can use a personal line of credit or installment loan to handle a minor emergency and pay back what you owe over multiple payments.
Take some time to visit MoneyKey to learn how an installment loan differs from a line of credit. This way, you can find a potential borrowing option to backup your emergency fund.
4. Make It Automatic
Whether you’re refilling an empty emergency fund or building one from scratch, consistency is key to hitting your target.
You’ll want to send some cash towards this account every month, without fail, if you expect your balance to grow.
One of the easiest ways to ensure you never miss a contribution is by automating this step. You can set up an automatic transfer to move money from your checking to your savings account according to any schedule you like.
5. Find a High-yield Account
Earlier, you read about how keeping your savings in an account separate from your e-banking makes it easier to ignore in non-emergencies.
This is a good tip, even if you have no problem keeping your hands off your savings.
The trick is to find a high-yield savings account that offers a generous interest rate on your deposits. This maximizes how much money you earn on your savings, giving your fund an extra bump.
Luckily, clinching a high-interest rate may be easier today than it has been in the past few years. During the pandemic, getting stuck with an APY of 0.06% wasn’t unusual.
Since the Federal Reserve raised interest rates on personal loans and savings, you might be able to get an APY as high as 3%.
When shopping around for savings accounts, read the fine print carefully. Don’t trade liquidity for a higher rate.
You need to be able to access your savings without any restrictions at the drop of a hat, so avoid accounts that place balance minimums or holds on withdrawals.
Saving an Emergency Fund Starts With 5 Simple Steps
While a recession may not happen, it doesn’t hurt to air on the side of caution. Follow this guide to save more.
These five tips will help you build an emergency fund ready for anything.