Establishing an emergency savings fund now can have a big payoff later on down the road. Setting aside emergency savings can help ensure you can get by in case of illness or urgent repairs to your car or home, as well as provide a safety net if you find yourself without a job. Here's how to figure out how much you need and how to get started.
Your emergency savings fund should be enough to cover your major expenses for six months to a year. Here are some important expenses to consider when determining how much to save:
Once you know what your emergency fund should cover, the next step is to set up a savings plan to build towards your savings goal. Decide on a specific monthly savings goal and then devote a percentage of every paycheck to savings. It's a good idea to pay yourself first by establishing automatic transfers into a designated savings account. Automatic savings can go a long way to ensuring strong and steady growth of your emergency fund.
Once you've committed to monthly savings, take some time to consider the options for where to put your emergency fund:
Certificates of Deposit: A Certificate of Deposit (CD) is a good choice if you want to earn a guaranteed rate of return for a set period of time (i.e. the term of the CD) and can plan for when you need to access your funds. Generally, you'll receive a higher interest rate if you buy a longer-term CD, however there may be a penalty fee if you need to withdraw your money before the end of the term. Another option is called a Risk Free CD®Footnote1. A Risk Free CD is a term CD that offers a fixed rate of return and enables you to access your money prior to the CD's maturity without paying a penalty.
Whatever savings account or method you choose, make sure you can access your emergency savings when you need it so you're prepared for the unexpected.