Life can be unpredictable. One day, you’re cruising along smoothly, and the next, you hit a proverbial pothole that threatens to throw your budget off balance. Whether it’s urgent auto repairs, a surprise medical bill, or abrupt job loss, emergencies emphasize the real need to have a financial buffer. Enter the emergency fund—a concept so important to financial well-being that we at Suffolk Credit Union are spotlighting it for Financial Literacy Month.
Why You Need an Emergency Fund
Expenses, just like life, can be unpredictable. Learn how an emergency fund helps shield your finances when life throws you a curveball.
What Is an Emergency Fund?
An emergency fund refers to savings that are kept separate from other savings and are earmarked specifically for emergencies, such as job loss. Essentially, it’s a financial safety net that helps you deal with the unexpected without having to rely on debt or drain other savings.
Remember that your emergency fund should be used only for true emergencies. Don’t use it as a vacation fund or as backup cash. If you want to save for a vacation, you should establish a separate account for that goal so you won’t be tempted to dip into your emergency savings.
What Events Can an Emergency Fund Be Used For?
Emergencies are an unfortunate fact of life, and they can be stressful to deal with and costly to resolve. Having money set aside in an emergency fund can provide valuable peace of mind, knowing that you’re financially prepared to handle emergencies like:
- Urgent home or auto repairs
- Job loss or other income disruptions
- Death in the family (for example, travel or funeral arrangements)
- Medical or dental emergencies
- Legal fees
- Natural disasters
- Other personal crises that require immediate financial attention
What Are the Benefits of Creating and Maintaining an Emergency Fund?
Building an emergency fund can have the following far-reaching benefits:
- It helps you stay in control of your finances with funds readily available for surprise expenses.
- It minimizes your reliance on credit cards, emergency loans, and other forms of debt.
- It avoids disrupting your long-term savings goals so you stay on track.
- It fosters a savings-focused culture for your family.
- It decreases anxiety and stress regarding your finances and ability to handle emergencies.
Have questions about emergency funds, choosing the right account, or other money matters? We’re here for you. Find a branch near you or contact us online.
How Much Cash Should Be in an Emergency Fund?
In general, you should aim to have enough in your emergency fund to cover three to six months of living expenses. Living expenses are necessities—items that you really can’t live without, like housing, utilities, groceries, insurance, and debt payments. If your financial situation allows, consider saving a little more in your emergency fund to give yourself a bigger financial cushion.
As you near retirement, consider growing your emergency fund until it can cover one to two years of living expenses. This can give you extra security during your golden years, when medical costs tend to rise and you may not always have a steady income.
Where Should an Emergency Fund Be Kept?
In some emergencies, like natural disasters, you may not be able to get to an ATM, banking systems could be down, or you may be unable to use payment apps. In these scenarios, cash will be essential for buying emergency supplies like gas, medicine, food, and other necessities. For this reason, a good precaution is to keep a reserve of $1,000 in available cash, which you can build up over time. Store it in a high-quality fireproof and waterproof safe that’s bolted down so it can’t be taken by a burglar.
The best place to keep the rest of your emergency fund is in an account of its own at a financial institution that you trust. You’ll need to choose an account type that will help grow your savings while meeting your unique needs and goals. Here are three options to consider:
- A savings account at a credit union that’s federally insured by the National Credit Union Administration, like Suffolk Credit Union, is a safe option for your emergency fund. Traditional savings accounts may not offer high rates, but your money will be easy to access. A high-yield savings account will typically provide more robust growth. Suffolk CU’s Save Your Way account is also a smart option, particularly if you’re starting small. It requires just $5 to open, can be named whatever you like, and earns dividends on balances as low as $100.
- A money market account can offer higher rates than traditional savings and gives you instant access to funds through checks, debit cards, and online transfers when you need emergency cash fast. It’s also federally insured by the NCUA.
- Money market funds are not bank accounts. They are a type of fixed-income mutual fund that invests in cash and low-risk, short-term debt securities. Money market funds tend to offer higher rates than money market accounts, but they do not have the protection of federal insurance. If you need cash fast, you can typically receive it from the fund within a day.
Work with a financial professional if you are unsure which account would be best for you. Whichever option you choose, be sure that you’re also contributing to your retirement account and building wealth for the future.
How Is an Emergency Fund Used?
When an emergency strikes, your savings are there to support you. If your funds are in a savings or money market account, you should be able to withdraw cash through an ATM or transfer funds to your checking account for instant access.
If you’re in a situation in which you need immediate funds but can’t access cash from your account, use a credit card to cover the cost, then pay yourself back from your emergency fund as soon as possible. Be sure to pay before the end of the current billing cycle to avoid incurring interest charges.
After you dip into your fund to cover an emergency, don’t forget to rebuild it so it’s ready for the next unexpected expense.
It Starts at Suffolk.
Life’s uncertainties don’t have to cause financial crises. By having an emergency fund, you’re not just preparing for unexpected expenses—you’re also buying peace of mind.
Suffolk Credit Union can help you take this significant step toward a more secure financial future. Our Save Your Way account is perfect for emergency funds, with a low opening deposit and dividend earnings on balances of $100 or more. Open an account online, name it “Emergency Fund,” and start your saving journey today.
