It has almost been two years since the pandemic began, and if there are any lessons to learn from living through these times, it is that you must expect the unexpected. Life will throw you curve balls left and right, so you must anticipate any hardships before they happen. Creating an emergency fund, before it is needed, will save you several headaches in the long run. You can never be fully prepared for an emergency but having a little cash on hand will help prevent any financial headaches. Throughout this ALLIANCE article, we will go through the basics of an emergency fund and the steps you can take to create one.

What Is an Emergency Fund?

Just as the name implies, an emergency fund is set aside to cover any unexpected expenses that may arise. While you may be tempted to make noncrucial purchases with the fund, your emergency fund should be reserved for emergencies. Additionally, never use your emergency fund to pay off any debt. You should strictly use it for unexpected expenses such as unemployment, medical bills, home repair, auto repair, etc. An emergency fund acts as a buffer against the unexpected. If you do not have an emergency fund, you are often forced to fall back on credit cards or loans to cover any unexpected expenses. Having the fund will help you prevent accumulating any unnecessary debt.

How Much Should You Save?

There is no one-size-fits-all answer for how much you should save. The amount needed will vary from person to person and should be based on income, spending habits, dependents, and general comfort levels. A good rule of thumb to follow would be to save 3 - 6 months of living expenses. However, the more you save, the better. You should assess your living and financial standards before starting your emergency fund so that you have a good barometer of what is necessary. Having any cushion in a time of crisis will go a long way in alleviating any financial stress.

Where Should You Save Your Money?

You never know when you will need access to your emergency fund, so you should keep it somewhere that is easily accessible. One option is to put the funds in a savings account like one of our ALLIANCE Money Market accounts. Opening a Money Market account will give you easy access to your funds as well as the ability to earn more due to its tiered rate structure. The more you save, the more you receive in dividends. These accounts are a great way to grow your emergency fund even once you have input your desired amount.

How Should You Get Started?

The first step would be to assess how much you will need to survive for six months. Add up all your expenses for six months and build around that as a minimum amount. This will tell you how much you will need to stay financially stable in a worst-case scenario.

The following step would be to set some savings goals. Evaluate how much you want to save each month, then transfer the money into the savings account where your emergency fund is being held. It may be a good practice to set up automatic transfers into your emergency fund, which will prevent you from forgetting to transfer money.  Doing so will help you avoid spending it before you get the chance to move it.

Lastly, you need to reevaluate and adjust your savings periodically. After a few months, you might realize that you are over or under-saving and need to adjust your budgeting accordingly. Whether you have too much or too little cash on hand, you will need to adjust your budget to accommodate any life changes.

While it may not solve all your issues, simply having an emergency fund will go a long way in preventing any potential financial headaches. You never know what life will throw at you, so it is wise to be prepared for anything. Just remember you are not alone. ALLIANCE is here to help you through whatever circumstances you find yourself in! If you have any questions, stop by one of our several branches throughout Lubbock or visit us online to learn more.