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How to Build an Emergency Fund

Many financial experts recommend building an emergency fund to stop unforeseen expenses from turning into debt or long-term financial difficulties. We break down how to build an emergency fund and take a look at some tremendous risk-free ways to turbo-charge your savings.

What Is an Emergency Fund?

Planning for the unexpected is an essential part of ensuring your long-term financial well-being. Unforeseen events such as an accident or illness can derail years of hard work unless you set aside funds to manage the threats you can’t see coming.

Setting up an emergency fund with the equivalent of several months of income is a big ask, but will allow you to survive setbacks that threaten your livelihood without taking on unsustainable debt or risking losing your home or retirement savings.

How big should your emergency fund be? When should you tap it? Where is the best place to keep your funds and, how can you manage your emergency savings safely while enjoying the best possible rates on return? We look at these questions and others in our handy guide to setting up your emergency fund.

Six Steps to Set Up Your Emergency Fund

Setting up an emergency fund takes more than good intentions—it needs planning, commitment, and action.

1. Start an Emergency Fund

The very first step might be the hardest—actually putting money aside for your emergency fund. How important is this? Personal finance expert Rachel Cruz recommends using your tax refund or holding a garage sale to create seed money to get your emergency fund started. Having something to build on will make saving in the future easier.

2. Keep It Close

Your emergency fund needs to be both accessible and separate—handy enough so you can access it quickly, but in a separate account so you won’t be tempted to spend it. An interest-bearing savings or money market account such as Credit Union of America’s Balance Boost account is ideal for this.

Balance Boost allows you to start saving with as little as $100, while the “tiered’ interest rate structure means your initial savings of up to $2,500 earns you the highest annual percentage yield, with dividends paid monthly. You’ll grow your emergency fund risk-free in our NCUA-insured account while knowing your funds are accessible whenever you need them.

3. Know Your Unknowns

Successful emergency saving means knowing the difference between real emergencies and ones that are somewhat predictable. An emergency fund is intended to protect you from the “unknown unknowns:” entirely unpredictable expenses.

By contrast, “known unknowns” are somewhat predictable expenses that will occur at some point, you just don’t know exactly when. This might be scheduled car repairs, major home maintenance projects, appliance replacements, or veterinary expenses.

Known unknowns should ideally be budgeted outside of your emergency fund. Because it takes discipline not to dip into your emergency fund for expenses you failed to plan for, having your emergency fund saved in a separate account (but still available) will make it harder to cross this line.

4. Define Emergency

So when is an unknown unknown a true emergency? How do you know when it is time to break the glass on your emergency fund? At Credit Union of America, we recommend considering any situation that may threaten your long-term cash flow itself as a potential emergency.

5. Calculate Your Goal

How much money should you eventually have in your emergency fund? Credit Union of America and other experts recommend around six months, but it really depends on how stable your income and household expenses are. The more steady your income is and the better controlled your spending is, the fewer emergency funds you’re likely to need.

Whatever you decide is a wise target for your emergency fund, it will probably look intimidating at first. At this stage, it’s important to remember that emergencies are unpredictable therefore having even some money in your emergency funds is better than none at all.  

6. Plan Your Saving

It’s also important to be smart about how you go about saving as your money grows. As your emergency fund accumulates it will earn less interest in the higher tiers of your money market account. At this point, it’s time to move some money into longer-term investments, knowing you will have funds on hand if you need them while you grow your nest egg.

Share certificates offer a safe tool for building savings while keeping money accessible. Credit Union of America’s NCUA-backed share certificates allow you to invest your money risk-free for anything between three and thirty months at a fixed rate. Our offerings include:

  • Flexible On-My-Terms certificates offer monthly dividends on amounts as small as $500 invested for 1-5 years. The longer you invest, the better your APY!
  • 1-Year-Add-On certificates allow you to start as small as $100 and add to your investment in $25 increments while earning monthly dividends.
  • 30-Month Bump certificates let you invest $2,500 or more and add into your principal, plus we’ll bump your rate once to match our 24-month certificate’s APY if it’s higher.
  • Special Certificates offering one-time rates and terms, available for a limited time only.

Talk to a Credit Union of America financial advisor about how investing in one or more share certificates can deliver a steady stream of income to keep growing your emergency fund.

Boost Your Emergency Fund

Credit Union of America’s Balance Boost money market account is the best way to maximize earnings as you start to put money aside for your emergency fund. You’ll earn interest on your balance while keeping your money separate from your day-to-day spending, and still be able to access your funds if you need to.

Talk to us today about becoming a Credit Union of America member and click below to learn more about our Balance Boost money market accounts.



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