April is Financial Literacy Month and to celebrate each week Auburn Savings Bank will be posting a new blog with tips to help you towards financial success. The third blog in the mini-series focuses on the importance of emergency funds and how to build one.
Life never goes as planned and can be filled with many unexpected events that result in financial emergencies. Whether it’s a sudden medical expense, car repair, or job loss it is important to have an emergency fund that can provide a safety net. This blog will explore the importance of emergency funds, how to build one, and how to maintain one.
What is an Emergency Fund?
An emergency fund is a savings account where you specifically set aside money to cover unexpected expenses that may come up in the future. Unlike your normal savings account, this account should be used explicitly for true emergencies ensuring that you and your family have the money to handle unforeseen expenses without going into debt.
Why do you need an Emergency Fund?
Financial Security: An emergency fund can provide you and your family with peace of mind knowing that you have a cushion to back on if needed without having to tap into your other accounts.
Avoiding Debt: With an emergency fund you can avoid taking out unwanted loans with high interest rates to pay for unexpected expenses.
Flexibility: Having savings set aside allows you to make better financial decisions without extra pressure of financial strain on you and your family.
How Much Should You Save?
The general recommendation for an emergency fund is to have three to six months’ worth of living expenses set aside. This amount typically varies based on family size and specific bills each family has.
Steps to Build an Emergency Fund:
Assess Your Expenses:
- Calculate your monthly living expenses including rent/mortgage, utilities, groceries, transportation and other essential costs.
- Use this amount to determine your emergency fund goal.
Set a Savings Goal
- Start with a realistic initial goal such as saving $500 or $1,000.
- Once you have reached your initial goal, continue saving until you have three to six months’ worth of expenses set aside.
Automate Your Savings
- Set up automatic transfers from your checking account into your emergency fund to ensure consistent saving without the temptation to spend the money.
Cut Unnecessary Expenses
- Review your budget and find areas where you can reduce spending. Redirect this money into your emergency fund.
Tips for Maintaining Your Emergency Fund
Replenish After Use: If you need to dip into your emergency fund, prioritize replenishing it as soon as possible for future use.
Avoid Temptation: Keep your emergency fund separate from your normal checking and savings accounts to avoid the temptation of using it for items other than an emergency.
Regularly Review Your Fund: Periodically review your emergency fund to make sure it still meets your needs. Adjust your savings goal if your expenses or financial situation has changed.
An emergency fund is an essential component of a healthy financial plan. It provides a safety net that can help you navigate life’s unexpected challenges without sending you into debt. Stop into one of our branches and start building your emergency fund today. Our Customer Service Representative’s at Auburn Savings Bank are eager to help you achieve your financial dreams.
This blog is for educational purposes only and should not be used as financial advice. Come inside and visit a branch, and one of our Loan Officers will be happy to assist you. At Auburn Savings, we nurture relationships, foster ambition, and are driven by purpose—You Come First. Bank On Us™.