Why You Absolutely Need an Emergency Fund

One important step in preparing for your future financially is building up an emergency fund. One interesting story on NPR on the subject, “Study: Nearly Half In U.S. Lack Financial Safety Net,” emphasized the importance of saving up an emergency fund and discussed the fact that far too many Americans still don’t have one. An emergency fund must be in place before you can be effective with many other aspects of your finances.

Here are 3 reasons why setting up an emergency fund is important:

1. You have something to fall back on when an unexpected expense arises.

2. You avoid going into debt or pulling from retirement accounts if you are in need of funds.

3. You have peace of mind that if something were to happen to your job you could maintain your lifestyle (for a given period of time).

Getting Started

You might have heard the general rule of thumb about an emergency savings account; set aside between 3-6 months of necessary expenses. Some people feel more comfortable with a year’s worth on hand, and that’s okay too. Be sure this money is accessible--put it in cash or a short-term savings vehicle. That is important because you want to be able to withdraw it today if necessary and be sure it won’t lose value.

It’s not always easy to start an emergency savings account, and some folks are trying to change that, which I’ll get to in a moment. Even if you only have a few hundred dollars to set aside, that is a very important first step. If you just added $20 per week to your emergency account, after a year you’d have $1,040.

Rewards for Saving

Fortunately, there are things being done to promote savings and help people get ahead. Of course, SaveUp is one example; not only are they rewarding people to save, but some of their prizes are focused on the establishment of emergency savings such as a “Rainy Day Fund” worth $25,000 or a “Deposit to Savings,” totaling $50,000. SaveUp’s model is based on a prize-linked savings mentioned in the NPR story. Prize-linked savings accounts, which give you a chance to win a grand prize when you save, is offered though some credit unions, but is still illegal in most states.

Other states and organizations are catching on too. A bill has even been introduced to Congress that would allow financial institutions to offer these types of incentives to encourage Americans to save for the future.

You can do your part by personally making emergency savings a priority, and of course, continue to SaveUp!

This post was written by SaveUp’s personal finance contributing writer, Catherine Hawley, CFP®.

Image source: The Partners’ Network

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