Personal Finance

Starting an Emergency Fund

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So you’re driving down the highway, and all of a sudden, you hear a lurch beneath your feet. Suddenly, your car slows to a halt. You find out your engine’s broken, and you’re likely going to need to fix it. But that’s an especially expensive fix — do you have the funds for it?

Turns out, most people don’t. Only 40% of Americans are able to cover an unexpected $1,000 expense. This means that most Americans are in fact living paycheck-to-paycheck. A small car accident or an unexpected health issue would render most helpless and in debt.

One way to ensure you’re set for freak accidents and other surprising expenses is by setting up an emergency fund.

An emergency fund is exactly what it sounds like — it’s an amount of money you save and use in case of any kind of emergency, like your car breaking down on the highway. The goal of this fund, rather than traditional savings or retirement accounts, is to minimize the effects of an emergency, especially a costly one. An emergency fund should have “at least 3 to 6 months’ worth of expenses.” But how does one even begin to start saving up an emergency fund?

The key is setting aside a portion of your monthly income for your emergency fund. You can put that portion of your income in a high-yield savings account that accumulates interest as you continuously keep adding to it, and that account becomes your emergency fund. Once you finally need to tap into your fund, its accumulated interest.

So now, back to our original question. Do you have the funds to pay for fixing the engine? Turns out, you do. You’ve been saving every month, and you’re set for at least 9 months. Good on you!

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