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Essential Strategies for Building Your Emergency Fund

AffinityFCU Building Emergency Fund
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By: Antinea Middleton
AVP Retail Operations Excellence

January 24, 2024

Life often throws you curveballs, which is why it’s important to be financially prepared for the unexpected. Building and maintaining an emergency fund should be an ongoing part of your financial plan. It’s important to understand how to set up your emergency fund and how it fits into your overall financial wellbeing.

Accurately Assessing Your Emergency Fund Needs

A critical step in emergency fund planning is determining the right amount for your fund. Traditional guidelines suggest saving enough to cover 3-6 months of expenses, reflecting the average duration of unemployment. However, real-life emergencies often require more – think about the cost of a typical home or auto repair costs these days. A 2023 report by Lending Club found the average emergency expense was $1,700, a notable increase from 2022. Additionally, the Federal Reserve's Survey of Household Economics and Decision making shows only 63% of Americans are prepared for a $400 emergency expense, highlighting the importance of a well-sized emergency fund.

Finding the Right Balance: Accessibility vs. Growth

Choosing the right place to keep your emergency fund is crucial. It needs to be accessible enough for actual emergencies but not so accessible that it's tempting to use for everyday expenses. Oftentimes, if people pull money out of their emergency funds for typical expenses, that money doesn’t find its way back to the account. That’s why options like short-term CDs or liquid savings accounts with a reverse tier structure offer a good balance. At Affinity, we have a great option for all members – the SmartStart high-yield savings account 3, where you can earn 4.00% Annual Percentage Yield ("APY") on the first $10,000 and 1.00% APY on every additional dollar deposited. These accounts provide easier access than long-term investments but also include structures that discourage impulsive spending.

Budgeting for and Reassessing the Fund

A common oversight when building an emergency fund is failing to include it as a regular part of your budget. It’s essential to treat this fund as a fixed budget item. This approach helps in steadily building the fund, ensuring it’s there when you need it most.

It’s also important to reassess your emergency fund periodically, ideally every six months, or after significant life events. This reassessment ensures that your fund remains aligned with your current financial situation and needs. Consider these practical tips to build and maintain your emergency fund:

  • Plan Ahead: Understand your financial needs and plan your emergency fund accordingly.
  • Set Realistic Goals: Base your savings goals on your actual income and expenses to ensure they are achievable. 
  • Automate Savings: Setting up automatic transfers to your emergency fund can help build savings consistently and effortlessly.
  • Stay Accountable: Sharing your savings goals with a trusted individual can provide motivation and accountability.

An emergency fund is more than just a financial tool; it's a cornerstone of financial wellbeing. It not only provides tangible financial security but also imparts a sense of confidence and peace of mind, which are invaluable for overall wellbeing. With this fund in place, you’re also less likely to make hasty or poor financial decisions in a crisis. It gives you the flexibility to evaluate options and make choices that are not driven by immediate financial desperation, likely leading to better long-term financial outcomes. By understanding the common challenges and implementing these strategies, you can create a fund that not only provides financial security but also peace of mind. Remember, Affinity is here to support you every step of the way in achieving your financial goals.

This information is for informational purposes only, is intended to provide general guidance, and does not constitute legal, tax, or financial advice. Each person's circumstances are different and may not apply to the specific information provided. You should seek the advice of a financial professional, tax consultant, and/or legal counsel to discuss your specific needs before making any financial or other commitments regarding the matters related to your condition.