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Ryan Marshall, CFP®
642 Wyckoff Avenue
Wyckoff, NJ 07481
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What is an emergency fund and why do you need one?

What is an emergency fund and why do you need one?

| September 20, 2021

What is an emergency fund and why do you need one?

Simply put - an emergency fund is a safety net to pay for life’s unexpected events.  People also refer to this as “a rainy-day fund.” Your emergency fund should be enough to cover 3-6 months of fixed monthly expenses in case something bad happens to you or your family.  If you are in a household with two separate incomes, it could be 3 months saved; and for single incomes, you should keep 6 months of savings. This savings should also be held in an account that you can access quickly, that does not decrease in value.

These accounts are rarely talked about within the media because it doesn’t draw ratings, but you will wish you had one if something goes wrong financially.  Recently, a large part of NJ experienced flooding due to Hurricane Ida, and insurance won’t always cover certain items, like replacing a furnace. Or maybe you were laid off during the COVID-19 Pandemic, and you need to cover certain expenses while unemployed.  Those are two good reasons to access your emergency savings.  Your savings should only be used in emergency situations and should NOT be used to fund your lifestyle.

What is the best way to get started with an emergency fund? 

You will need to open a savings account. You may already be using an account at your bank as an emergency savings account, but maybe there is a better alternative?  I recommend online savings accounts (ie., high yield savings).  These accounts often offer higher interest rates, but you need to be careful that they are FDIC insured and secured.  For those that want more information on FDIC Insurance please check out these FAQs directly from the FDIC -

If you have a Credit Card through companies like Capital One, Discover or American Express, you may want to consider what savings options they have to offer. It might be easier to open a savings account if you are already a credit card customer/user.

Most online banks allow you to keep your existing banking relationship and then you would just transfer money back and forth from your existing bank into the new online bank.  If you don’t feel comfortable with this, then continue to use your existing savings account. 

How can I build an emergency savings account?

  1. Include this as a line item in your monthly budget?
  2. If you don’t like to budget then, start an automatic savings plan to get started.  Pay yourself first with automatic transfers.
  3. Don’t have any extra income? I’d recommend you consider selling things you don’t use anymore.  It’s free and you usually aren’t using that stuff anyway.
  4. Start a side hustle and use that extra money toward savings.
  5. Change your tax withholdings if you get large tax refunds to help increase your monthly cash flow.

3 questions to ask yourself before you dip into your Emergency Fund:

  1. Is it urgent?
  2. Is it unexpected?
  3. Is it necessary?

If you have any questions about Emergency Savings Funds, please feel free to reach out.