Build an Emergency Fund for Peace of Mind

An emergency fund is money stored in an easy-to-access savings account that you can draw from to pay for unexpected emergencies. If your home's HVAC system dies? You can tap the money saved in your emergency fund to pay for it. If your car needs $2,000 in unexpected repairs? Again, you can draw the dollars from your emergency fund.

You can also rely on an emergency fund if you temporarily lose a main source of income. Say you lose your job. You can use the money in your emergency fund to cover your bills while you search for new employment.

Why an emergency fund matters

Why is building an emergency fund so important? If you have such an account, you won't have to resort to covering unexpected expenses with your credit card or by taking out personal loans.

Credit cards and personal loans come with high interest rates. Consider credit cards: Depending on the strength of your credit, the interest rate on your cards can be as high as 29%. If you put a large expense on a high-interest credit card and can’t pay it off in full by the next due date, the debt can grow quickly due to the high interest rate.

With savings in an emergency fund, you don't have to worry about high interest rates. If an unexpected expense comes up, you can use the money you've already saved to pay it off.

How much should your emergency fund hold?

It is recommended that your emergency fund hold three to six months of essential living expenses. These expenses include your mortgage or rent, utility bills, and the money you spend on food and transportation each month.

For example, if your monthly costs amount to $3,500, you should have from $10,500 to $21,000 in your emergency fund. You should keep this money in a savings account that is easily accessible.

That might seem like a lot of money to save up. That's why it's important to resolve right now to start building your emergency fund. Most people can't simply deposit thousands of dollars into a savings account at once. Instead, they need to deposit smaller amounts of money each month into an account to steadily build their emergency fund over time.

Say you want to build an emergency fund holding $15,000. You can start by resolving to deposit $1,000 into a savings account each month. It will then take you 15 months to reach your goal.

The key is to not use the money in your emergency fund unless it's to cover a real emergency. Want to take a vacation? Don't dip into your emergency fund. Your car's transmission goes out? You should use the money in your emergency fund to cover this expense.

Building an emergency fund does take dedication. But if you resolve to at least start the process this year, you'll be building a future that's financially healthier.