Why should I build an emergency fund?

It’s easy to spend all the money in your budget (even if you don’t have one), but what happens when you have an expense you can’t anticipate? Whether you have a flat tire or need to make a surprise purchase, having an emergency fund can be a financial lifesaver.

Of course, some emergencies don’t impact the amount of money that you spend, but the amount that you earn. A common issue people face is losing their job. Suddenly, you have little or no income, but your fixed expenses stay the same. Any surprise that causes you to spend more money than you earn is an emergency.

So, what is an emergency fund? Simply put, an emergency fund is an amount of money that you set aside to cover expenses that you can’t anticipate. Generally, an emergency fund is kept in a bank account to accumulate interest until it is needed, as well as to ensure that the money is safe, both from being lost and from accidentally being spent. The best part is that starting an emergency account is easy!

  1. Know your Needs and Wants: The first step is knowing how much money you would need if an emergency occurred. If you lost your job, how much would you need to live your life for a month? Two months? Also, be realistic about your needs. You might be able to cut back on your trips to the movies if money is tight, but it’s unlikely that you can instantly move to pay lower rent.
  2. Know How Long to Prepare For: Do you feel safe having one month of expenses on reserve, or do you need more? After the Great Recession, many people agree that you need between three to six months of expenses to be completely safe.
  3. Get Started: This is the hardest part. Start with small goals and add to it over time. If you can only start with a few dollars a week, it will grow over time and be a lifesaver when you need it!

Written by Collin Smith, Financial Wellness for College Students Peer Educator, University of Illinois Extension, 2017.

Reviewed by Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.

Expect the Unexpected – Saving for Emergencies

Planning for the unexpected can ensure that you are able to weather a financial hardship should you lose your job, have a car repair, or any other unplanned expense. By having savings set aside for emergencies, you decrease the need to rely on credit cards or loans to cover emergency situations. Borrowing funds to cover emergencies can create additional financial hardship. Most experts recommend that you have between three and six months of income set aside in emergency funds, but having any money set aside can help when a financial storm arises.

A recent survey has found that “18- to 30-year-olds are the most likely to have up to five months’ expenses saved up since they might have the benefit of lower expenses due to having roommates, living with their parents or being students.” Your college years can be an ideal time to create and build your emergency savings.

If you’re not sure how to start saving for an emergency, here’s a crash course in what to look for:

  • Prioritize your spendingneeds come before wants. If going without something could cause you physical pain or injury (like water, shelter, food, medications or proper clothing), then it’s probably a need. If you could get by without it, it’s likely a want.
  • Analyze areas of opportunityidentify ways you can save. If you cut out a $4 beverage or snack just once a week, you could save over $200 a year.
  • Save extra moneyturn birthday money into a rainy day fund. If you don’t have regular income, putting away gift money or profit you make off selling unused items can help start your emergency fund.

Getting Through Tough Financial Times is a resource developed by University of Illinois Extension to help individuals and families weather financial storms. This site provides information on spending habits, managing finances, and smart savings strategies.

Written by Sheri Williamson and Andrea Pellegrini, University of Illinois USFSCO Student Money Management Center