by Nick Craven, AVP Business & Consumer Banking
When building a strong, dependable plan for your personal finances, one of the foundational elements is an emergency fund. Setting aside enough money to address basic expenses gives you a valuable safety net that provides critical financial support in a scenario where you're laid off or can't work due to medical or other reasons. This fund also provides peace of mind in everyday life, allowing you to relax and reassure yourself if your thoughts ever drift to considerations like "How would I pay my rent or mortgage if I was out of work for two months?"
Let's look at how much money to set aside, and then review why using your checking or savings account to securely store this money is a particularly effective approach.
Understanding the emergency fund
Your emergency fund should help you address expenses that are unpredictable, unavoidable and have a major financial impact on your day-to-day and long-term existence. While the need for new tires or a regular tune up for your car doesn't quite qualify as an emergency fund expense because these are predictable, there are plenty of auto maintenance issues that can't reasonably be discovered ahead of time. These issues would qualify as a legitimate emergency fund expense. Other legitimate - and more substantial - uses for an emergency fund include repairs to a home following a major weather event, paying basic bills like rent and utilities while out of work and covering sudden medical expenses.
An emergency fund doesn't just allow you to have money on hand to deal with unexpected circumstances, it also allows you to avoid the negatives that come along with alternative methods of accessing necessary funding, as Investopedia pointed out. In situations where there are no other options, a high-interest credit card or loan can help keep you afloat. However, these options have obvious drawbacks. There's the potential to not be approved for the card or loan, the delay that's attached to the approval process and, of course, the interest that must be paid in addition to the principal. By saving this money and setting it aside, you reduce overall financial liability should a major, unforeseeable expense arise.
The general advice for emergency funds is to set aside an amount equal to between three and six months of basic expenses. This includes fixed costs, such as rent and utility bills, as well as groceries, gas and similarly flexible but still vital needs. Because everyone's financial situation is different, the best approach is to review your recent bills and spending in relevant categories and settle on a number that falls within the recommended range.
Why your checking or savings account is a great place to keep your emergency fund
Saving the money that sits in your emergency fund is the most important task when it comes to this financial need, but finding a secure place to store it is a close second. When you keep your emergency fund in your checking or savings account, you accomplish two key objectives: You make sure your money is liquid and ready to be accessed at any time, and you leverage the Federal Deposit Insurance Corporation to keep it safe even in a worst-case scenario. Because you can't plan for the unexpected, savings and checking accounts are especially powerful choices for keeping your emergency fund safe, stable and accessible. Just make sure you don't accidentally dip into your emergency fund when making everyday purchases - you can either open a separate account to avoid any accidental spending or keep the amount you need to maintain in the account in mind.
TAB Bank is proud to offer a range of accounts that can serve your regular checking and savings needs while also serving as effective vehicles for storing an emergency fund. Check out our personal banking options and get in touch for more information.