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How To Build & Use Your Emergency Fund

Bank Account For Emergency Fund - Job Loss, Car Repairs, Medical Emergencies, Home Repair

Think about where you were two years ago around this time. Except for the occasional late night Netflix movie binge, the word pandemic was probably not on your radar.

Nassim Nicholas Taleb is noted for his contemporary version of a “black swan” event, which is something unpredictable, except perhaps when considered in hindsight. COVID-19 is precisely one of those black swan events. An actual pandemic is not an uncommon event over broad spans of time, historically speaking. However, to the world of the 2000s and 2010s,  the concept seemed alien to most of us.

Of all of the fallout generated by the pandemic, one of the most common is economic fallout from lost wages or lost jobs. The event has crippled entire industries and changed the face of business in many ways. While a black swan event is just that, there are some things you can do to help soften the blow of an unexpected event.

One of the largest tools in your belt is an emergency fund. The purpose behind an emergency fund is really quite simple. You have an emergency fund because you cannot predict what will happen in the future. The money is stored away for that inevitable time when Murphy’s law strikes and you need to pay the bills or make it through a rough patch.

So if the air conditioner goes out in July, your car quits running Monday morning, or you find yourself in the ER for a late night visit, you won’t sweat it quite as much knowing you have some money socked away to handle the emergency.

How to Save Up for an Emergency Fund

You often hear of “life hacks” or other little ways to figure out larger problems. Saving up an emergency fund can be a challenge for some, but there are some ways to make it easier. A beginner emergency fund would be around $1,000. This $1,000 figure would cover most emergencies such as car repairs, a hospital deductible, or other issue.

Some ways to save up a $1,000 emergency fund include:

  • Forgo that daily coffee and drink something instead. If your cup of coffee costs $4-$5/day for a large, then opt for a smaller size or save the money by making your own. $5/day gets you to $1000 in 200 days, or less than a year.
  • Look for other areas to cut your budget or change up your lifestyle. Believe it or not, most people can shave $1000-$2000 off an annual budget by just making small changes. Find expired food in the fridge or pantry too often? Then that’s a great place to start!
  • Sell some items. In the old days, this would mean a yard sale or garage sale. These days, it’s easier than ever to sell some unused items on social media. Clear up the clutter and turn those unused items into cash. Gamify things and challenge yourself to sell $1,000 worth of stuff.
  • Come up with a side hustle. This is just another way of finding a way to make a little bit more money. Cut some local lawns and rake some leaves, or put your crafty talents to good use.

What to Do With Your Emergency Fund

The number one rule of an emergency fund is not to touch it until you have an emergency. That seems silly to say, but a great deal on an appliance, TV, or weekend getaway is not an emergency, no matter how great the offer. You should tuck your money away, preferably untouched. If the event that you plan to use the money for is unexpected, required, and urgent, then (and only then) you have met the threshold for using your emergency fund.

The other thing you want to do is keep your emergency fund liquid - or available via a means that you can quickly get access to should you need it. In other words, socking away your emergency fund in investments or in a Certificate of Deposit might not be the best idea. You need to be able to get to your money relatively quickly if you need it in those forms.

The best place to put your money is in a good, old-fashioned savings account. This keeps your money liquid and available with nothing more than a quick internal transfer to your account for a debit card purchase or cash withdrawal.

The other item is that your emergency fund can grow as you need it to. For starters, $1,000 is a great way to insulate yourself from a lot of common emergencies. However, you may have other needs. You may need $2,500 or $5,000 to cover that decade-old furnace unit’s probability of going kaput. As you become more stable, you may be able to save a little bit more in your account. Working your way up to 3-6 months worth of savings can offer even more peace of mind when the bad stuff happens. This includes unexpected job loss or an extended medical emergency.

Last but not least, if you use your emergency fund, don’t forget to replenish it!

Begin Saving Your Emergency Fund Today!

Don’t kick yourself the next time Murphy’s Law strikes. Knowing that you have an emergency fund can take a little bit of the edge off of something that would otherwise feel like a disaster. You can reduce your reliance on costly sources of emergency funding like high rate credit cards or expensive loans. These can leave you feeling like you are even further behind when the unexpected happens

 Now that you know what an emergency fund can do to help you, it’s time to think about putting on in place. Let First Palmetto Bank help you set up a savings account today for your emergency fund. With quick access via internal transfers or BillPay, it’s a great place to situate your funds for when the need arises.