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What is an Emergency Fund, and Why Do I Need One?

Building an emergency fund is one of the best ways to give yourself peace of mind in the event of a financial situation you weren’t prepared for. We’re here to help you get started, from understanding what exactly you should be saving your emergency fund for to tips and suggestions for how to grow your savings account.

Piggy Bank with the words Emergency Fund written on it

No one wants to think about an unexpected emergency, but those rainy days will inevitably happen. Studies have found that more than half of Americans couldn’t pay for an unanticipated $1,000 bill straight from their bank account, with 40% struggling to afford even a $400 emergency expense.
Building an emergency fund is one of the best ways to give yourself peace of mind in the event of a financial situation you weren’t prepared for. We’re here to help you get started, from understanding what exactly you should be saving your emergency fund for to tips and suggestions for how to grow your savings account.

What Is an Emergency Fund?

An emergency fund is a dedicated amount of money you’ve set aside for unexpected expenses. This money should be stored in a separate savings account to be accessible when you need it most, but it isn’t confused with any other money you have in your bank account. 

Even when you’re young and in the earliest stages of making your own money, putting aside a small amount of cash each week or month is a smart way to invest in your financial future. You never know what’s around the corner, so start building good financial habits as early as possible. Consider adding this to your new homeowner checklist when you purchase your first home. 

What Events Are Considered A Financial Emergency?

Anything you’re not financially prepared for could be considered an emergency. But significant life events are generally what you should be using these funds for, like:
  • Losing your job—this is the most important emergency to prepare for, as this impacts your ability to pay for your normal expenses.
  • Broken appliances
  • Medical emergencies and unexpected bills
  • Car breakdowns or repairs
  • A death in the family
  • Unexpected travel due to a family emergency
  • Pet emergencies and vet care
  • Natural disasters

How To Start an Emergency Fund

When you’re starting to build your emergency savings, look at where you can adjust your budget to free up some spare cash. If you’re not already budgeting, this would be an excellent time to start.

Putting aside money from each paycheck is a great way to gradually save more for emergencies. Automate your savings so you don’t need to manually move money from your checking account to your savings account. If you can, set up a designated savings account just for your emergency fund so you’re not tempted to spend that money on regular expenses.

It would help if you aimed to have around 3 to 6 months of expenses in your emergency fund. But if that feels like a stretch right now, remember that every small amount helps. When you can contribute more, that’s even better. Remember that one-time income like tax refunds, bonuses, or inheritance are all excellent ways to fund your emergency savings account.

Where To Keep Your Emergency Savings

There are a number of options where you can keep your emergency fund. However, the most important aspect to remember is how accessible the funds are should you need to take them out of an account.

A high interest savings account is a great place to start. For even better interest, a money market account can earn you additional cash while you’re saving on your own. These accounts do require a higher opening balance but allow you to withdraw up to 6 times per month if needed.

For FNBT customers, a Four Seasons Savings account is an excellent choice for annual withdrawals. As a special savings club account, you’ll benefit from interest annually, with no monthly fee or minimum balance required.

Why Do You Need an Emergency Fund?

Having savings is always a sensible financial move, but an emergency fund is your most important savings account. 

Even a small, unexpected bill can set you back months if it turns into ongoing debt. Without a savings fund, an emergency expense could lead you to rely on maxing out credit cards or taking out high interest loans, which will ultimately cost you more money to pay off.

For homeowners, a home equity loan or line of credit can help in an emergency. Still, having adequate savings before you reach this point will always be better than finding yourself owing money to a lender. 

You also want to do everything you can to avoid dipping into your retirement funds early, especially if you’re still young enough to accrue penalties for early withdrawal. You’ll need to pay that money back into your account and will have lost some traction on compound interest by removing some of those funds.

Without an emergency fund, you may need to sell some of your assets, which can take time. Remember that emergency savings help you avoid these potentially life-changing financial mistakes, so it’s best to save upfront whenever possible.

Savings Accounts to Complement Your Emergency Fund

Aside from your emergency fund, there are a few other savings accounts that you can use to prepare for the future.

A health savings account is a tax-free way to budget and plan for medical expenses. You can use these funds to pay for medical care and recurring prescriptions throughout the year. Read more in 8 Reasons to Open a Health Savings Account. 

It would help if you also considered your post-work years and looked into different retirement account options. For example, an individual retirement account or IRA can help you save for when you’re older and no longer have an income to rely on. These funds grow over decades of savings thanks to compound interest and will cover your everyday expenses in your golden years.

Start Your Emergency Fund with First National Bank and Trust 

Embarking on your savings journey can feel overwhelming, especially if you’ve never worked on financial goals. At First National Bank and Trust, our team has provided financial advice to the community since 1882. We have more than a dozen branches conveniently located throughout Southern Wisconsin and Northern Illinois. You can visit us in Beloit, Clinton, Delavan, Darien, Elkhorn, Janesville, Argyle, Monroe, Walworth, and Williams Bay, WI, or Rockton, Roscoe, and Winnebago, IL. 

We’re here to help you find the right accounts that suit your financial situation and ensure you’re prepared for any emergency. Contact us today or stop by one of our branch locations to open a savings account and start building financial security for you and your family.