3 minute read
Having even a little extra cash on hand can help protect your budget.
At First Foundation Bank, we value your financial stability and want to help you preserve it no matter where you find yourself in your financial journey. An important component of maintaining your financial health is having enough money in your emergency fund.
What is an emergency fund?
An emergency fund is money you’ve set aside to cover any unexpected disruptions to your finances. It’s not the same thing as money you’re saving for planned expenses like a vacation or a new car. And it’s not for impulse purchases, either.
Consider how losing your job, experiencing a medical emergency, or needing to fund an unexpected car or home repair might threaten your financial health. An emergency fund is there to help you avoid adding to your debt in situations like these.
How much is enough?
Experts recommend setting aside enough cash to cover three to six months’ worth of expenses. The more you have saved, the more time you will have to find a new job, or recover from an injury or illness, before your household finances are put at risk.
If you aren’t sure how much you spend in a month, start by gathering your recent financial statements. Add up how much you spend on fixed expenses each month, such as rent, utilities, and groceries.
Next, tally your discretionary purchases—things that you have the option to delay or skip altogether if you need to. Those two numbers will tell you what you need to have on hand to cover your current spending habits and how much you’ll want to target for your emergency fund.
Even a little can help
If your savings target sounds too high to achieve, don’t let it stop you from saving what you can. Even a modest emergency fund can provide a measure of protection to your financial health.
Not all emergencies involve losing your income for months. This fund can also help cover unexpected emergencies that might have smaller price tags, such as a plane ticket to visit an ailing relative ($250) or new brake pads ($500). Neither amount represents a huge sum, but if there is no room in your budget for them, they can start a snowball of debt that could risk your financial stability down the road.
So, start today by setting aside what you can in your emergency fund—it will help protect your finances long before it’s fully funded.
Can you save too much?
Every little bit helps—to a point. Because you need to keep your emergency fund in a safe and readily accessible account, you shouldn’t expect to earn much interest on that money. Saving more than you need in this fund means you are losing out on the potential interest you could be earning by keeping the excess cash in an account better suited to the time horizon for a different goal, such as retirement.
An online savings account at a bank with FDIC insurance is a great option for keeping this cash liquid while still earning some returns to battle inflation. A liquid account like this is typically better for storing your emergency fund than a CD, as there are no penalties to withdraw the money. It is also safer than an investment account, which is susceptible to market movements that could erode your savings at just the time you need them. The unpredictability and volatility of the financial markets makes an investment account a poor choice for your emergency fund.
When it comes to online savings accounts, the good news is that there are several options to choose from—just make sure that whichever online savings account you select a) pays a decent interest rate, b) provides the ability to link and transfer to other accounts, and c) offers easy access to your funds.
Now that you know the value of an emergency fund, we hope you’ll be inspired to start one of your own if you haven’t already. It’s an important step in taking control of your personal finances.
Check out our Savings Goal Calculator to see what it will take to reach your goals.