If there’s one thing the current COVID-19 crisis has taught us, it’s the importance of having an emergency fund to cover unexpected expenses. Long after this global pandemic passes, your emergency fund will be the foundation of your financial plan, allowing you to bounce back resiliently from unexpected expenses like a job transition, medical copays, or home repairs.
Here’s what you need to know.
What is an emergency fund?
An emergency fund is money you set aside, often in a separate bank account, specifically to cover unexpected expenses. Prepare yours now so that when the unexpected happens, you won’t have to go into debt or dip into your long-term savings like your retirement account.
Why do I need an emergency fund?
Small and large unexpected expenses happen all the time, but as long as you have a cushion of savings, unexpected expenses like these don’t have to derail you:
Home or car repairs
Emergency medical procedures
Finding yourself suddenly unemployed and losing your income
A sudden, extended illness
Worldwide pandemic (COVID-19) and economic recession
How big should my emergency fund be?
Ideally, you should aim to build an emergency savings that will cover three to eight months of your living expenses. This may sound like a lot of work, but the small spending sacrifices you make as you build your emergency fund will be well worth what you gain in peace of mind.
How do I build an emergency fund?
No need to stress out about saving three to eight months’ worth of expenses all at once. It takes time to build an emergency fund. Here’s how to get started:
Track your expenses. Use a budget to manage spending and any outstanding debt. Find places where you can cut back on unnecessary spending.
Start a savings account. Put aside whatever you can every month.
While you are building your emergency fund, remember to continue paying your credit card bill on time and in full every month to build and maintain good credit. (Good credit will come in handy in an emergency, too!)
Remember to replenish your emergency fund every time you use it
Once you have established your emergency fund, you’ll be able to breathe easier knowing you’re ready to handle bumps in the road without going into debt. Just remember: after each time you use your emergency fund, replenish it so that it will be ready the next time you need it.
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