Dear “Just Starting Out in Financial Literacy”, I hope that you are doing very well, both mentally and physically. So, I have been hearing and reading about that many people don’t have an emergency fund. In fact, according to “The Ascent” (a Motley Fool publication), 50% of Americans have under $500 in emergency funds. That is not a very good statistic. But, do you even have one. I fear that, in school, you may not have been taught about the necessity of having one.
But,…?
What Is An Emergency Fund?
An emergency fund is money that is set aside for a unexpected and significant problem. These emergencies include unexpected large drops in income or the complete loss of income. So, this money is there to help you survive in a situation such as unexpectedly losing your job.
An emergency fund needs to be able to cover your living expenses while you look for a new job.
Money in this type of account is not part of your long term savings. Saving for something like college tuition or buying a new car goes into a different account.
What Is The Difference Between Savings and An Emergency Fund?
The difference between savings and emergency funds is primarily how the money is designated to be used.
Money in savings is designed to be used for a future purpose. That purpose can be specific like a downpayment for a house, or it can be general with the use determined later.
On the other hand, money in an emergency fund is set aside for some unplanned problem. So, rather than for it being for a specific purchase, it is for something unexpected, serious, and often a dangerous situation, hence being an emergency.
What Is The Difference Between An Emergency Fund and An FU Fund?
As implied by the name, an emergency fund is there for unplanned, serious, and often dangerous situations. Think of it as a fund to cover your living expenses for a period of time should you unexpectedly lose your job.
On the other hand, an FU fund is money that you set aside in case you decide to change your employment status. It is money that once obtained, allows you to feel comfortable stepping away from a specific paycheck.
An FU fund can be a specific amount of money that you set aside, such as enough to cover 3 months of expenses. This money could be used while you look for another job, or it can be a source of passive income that will cover your basic living expenses.
You may have the same target balances for the two accounts. But, the purposes and designated uses for the two funds differ.
What Is The Best Place To Keep An Emergency Fund?
Emergency funds should be kept safe and easily accessible. This means that you should not put this money into the stock market or any risky investments. This also means that you should be able to get to the money quickly and without incurring any expenses for doing so.
An average yielding savings account would not be a good choice for an account like this, because using one would mean having a chunk of money setting in an account receiving minimal interest.
Instead, high yield savings accounts are good choices for emergency funds.
My favorite bank for high yield savings accounts, especially an emergency fund, is CIT Bank. I bank there because of their high 4.05% APY (at the time that I am writing this) on their Savings Connect Money Market Account.
Wherever you hold yours, it should be connected to your checking account so that you have access to it in case of a sudden, unexpected problem.
How Much Should I Keep In My Emergency Fund? .
Typically, it is suggested that you have a minimum of three months of your living expenses saved in your emergency fund.
Some sources suggest three to six months of your living expenses.
There are higher suggestions that exist, depending on the source and sometimes depending on your age, with higher amounts typically suggested for those entering or in retirement.
These suggestions may seem difficult. But here is the thing…Building an emergency fund takes time. Just get started and keep going.
Key Takeaways Regarding Emergency Funds
- An emergency fund is money that is set aside for emergencies.
- Money in an emergency fund differs from a savings account in that the money is only for unexpected emergencies, rather than saving for a specific expense, such as for a car.
- An emergency fund is different from an FU account, because unlike an FU account, which is money you set aside to give you a sense of freedom to leave a job if you want to do so, an emergency fund is for situations when an unexpected loss of income is thrust upon you (like if you got fired.)
- The best place to keep an emergency fund is someplace where it is both safe and accessible, while at the same time earning higher interest rates than in the average savings account.
- A high yield savings account would be a good place for an emergency fund.
I hope that you either have or are building your emergency fund.
As always, I am wishing you the best.
Hugs,
Rich Mom
P.S. If you don’t already have one, please don’t wait to start your emergency fund. Even if you only have a small amount with which to start, every little bit does count, and if put into a high yield savings account, compounding will help out.
Would you like to get more ideas about handling your finances? Check out:
Do You Have An Emergency Fund
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Rich Automatically
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Also, please note: I am not an investment advisor. Always do your own due diligence and research before investing. Check with your own investment advisor.
The information shared here is not intended as financial advice, just encouragement.
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