An emergency fund is the money you save for the sole purpose of paying for unforeseen financial emergencies that would cause your budget and financial progress to be completely thrown off. A major car repair and an emergency root canal were two events that occurred and it was appropriate to tap into these funds.
Just imagine how hard it would be for you to pay for unplanned emergencies using the income that was already allocated to your monthly bills? You would have to either fall behind on payments or borrow money/credit. Which leads into my next point…
An added benefit of having a small sum of money to fund financial emergencies is the ability to stop borrowing money. I knew that one day my financial focus would shift from attaining financial stability to attaining financial freedom and I would begin to pay off debt. So, if I stopped the process of racking up debt and paying for things with cash now, it will be easier to become and stay debt-free later.
So, keep approximately $2,000 in your emergency fund savings account at all times which is more than enough to cover small issues. When an event occurs, use the money from this standard savings account to pay for it. And every time you withdraw money from this account, make sure to allocate money in your budget to your Emergency Fund each month until it reaches $2,000 again.
I also had a standard checking account connected to this savings account because it gave me easy access to all of my money. It was where the checks from my employers were deposited. I managed the cash that accumulated in here with my monthly budget.
Each pay period, I automated a portion of my income to my savings account. If your income is irregular and unpredictable, manually transfer money on designated days of the month.
Although there are many ways to manage your bank accounts, I have found that having one account of each type and automating money from one to the other works best during the beginning stages of creating a strong financial plan. Learn more about organizing your bank accounts here.
Tara’s Tip: Use a credit union. Credit unions are typically not-for-profit financial institutions. What that means for you is that they are able and more likely to offer higher interest rates on their savings and investment accounts and lower monthly and annual fees. Banks are typically for-profit companies and their goal is to make as much profit from their products and services, this results in higher fees.