The Importance of an Emergency Fund

Having a cash reserve helps with unexpected expenses

An emergency fund is key to financial security and peace of mind. It works best when you establish a budget and regularly set aside money to help with unexpected expenses. Having additional money set aside alleviates the use of high-interest credit cards or high-interest loans. To ensure your emergency fund works for you, make your goals realistic.

What is an Emergency?

Mark Landy, Retail Banking Manager, says, “An emergency fund is different for each person. Emergencies are defined on a case-by-case basis and the amount of money set aside is different for everyone.” First, determine your budget and define an emergency. Your budget helps you know how much you can set aside. An emergency may be saving money for car repairs. Or something more extreme like losing your job and struggling to pay your bills without any income?

Make an Emergency Fund Work for You

If you are starting your emergency fund or don’t have a surplus of money to deposit into an emergency fund, start small. Landy says, “Start with 10-20 dollars per month. While it may not seem like very much, the point is you are trying to save for something on the horizon that you didn’t expect.” He believes it’s beneficial to open a savings account and start putting money into the account so you can accrue interest.

The more you save, the more you can diversify your accounts. For example, putting money into a CD earns more interest than a regular savings account. Landy discusses a method called building a ladder. First, put a portion of your emergency fund in a certificate of deposit (CD). Then, in three months, open another CD, and in another three months open another CD. The purpose of this staggered ladder method is to earn you a higher rate of interest and the ability to access your money as your CD matures. By the time you open your third or fourth CD, the first one has matured, and you can access the money if you need it.

While CDs earn more interest than a savings account you need to keep in mind that if you access money in a CD before it matures, you may pay a penalty. It’s important to talk with a banker when opening CDs.

Share Emergency Fund Goals with Your Children

Landy is a firm believer in sharing these tips with your children. It doesn’t matter how old they are, talk to them about saving. Help them open a savings account or CD and teach them to save. Landy says, “If they have some skin in the game, they will understand the value in something.”

If your child gets money for a holiday, have them save 10 or 20 percent. Then, if one of their toys breaks, they can access their emergency fund to replace it. While this may not constitute an emergency, it shows your child the concept of an emergency fund.

Having Fun While You Build an Emergency Fund

If you feel like all your money is going to pay your bills and save, remember to allow for things you enjoy. Making memories with friends and family along with buying things for fun is important. You don’t want to end up resenting yourself for sticking to a budget that is too strict.

Your emergency fund should provide a safety net for unexpected expenses. Get intentional and start building the fund today and be ready for more things that come your way.