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It's a hot summer day and the sun is at its peak while shining down its direct heat and bright light. Bottles of water are quickly consumed and everyone is soaking up the cool draft from the air conditioning.
Then as the temperature bulb pushes the red beam up to 102 degrees, you notice a warmer temperature change coming from the vents with humidity climbing and the cool air is dissipating. Your worst fears have come to reality. The air unit has stopped working and the repair guy can't make it for another three hours. When you research the cost of such a unit replacement, the multiple zeros stand out in your mind as you think, "How am I going to afford that?".
Why an Emergency Fund
It is exactly what it is meant for...emergencies, not necessarily medical emergencies but for events that cause financial strains in the short-term. Having an adequate amount saved can truly be a blessing if one were to lose a job or should an automobile break down plus having a sufficient amount saved can really be a financial lifesaver.
How Much to Save
Is $500 enough? Or $1,000? It's highly recommended to save between 3 to 6 months worth of your monthly income. For example, if you make $3,000 a month, then 3 months would total $9,000. This amount might seem like a lot to save but considering this is paying your mortgage, rent, groceries, electrical bills, phone and other household expenses, it is less than you think.
Where to Put the Emergency Fund
When it comes to putting money away for emergencies, liquidity is key. You need to put the money in a safe place (not under your mattress) where it can be quickly accessed should such circumstances arise. A savings account that yields some interest or a money market account will allow your money to earn some interest. While the interest won't be much, just remember the importance of the fund and what it's for.
How to Save
Because building 3-6 months of income can be a daunting task, the first thing to do is establish a goal amount. What is your number to save? Next, determine how much each month you can put away towards this goal and every time you get change or have extra money left over at the end of the month, sock it away into the fund. If you can't come up with anything to save, then read the article "Where To Cut Expenses" to find areas to cut or to save.
You may also need to search for extra income. There are several ideas in "5 Best Part-Time Jobs". Another great source of building your emergency fund is saving your end of the year tax refund. The average U.S. tax refund in 2016 was $3,000 and if you are about the average refund, then you are a third of the way there. Therefore, set realistic goals when saving. Don't establish a timeline that may be unattainable and do not be discouraged should it take longer than expected to save.
If you have great ideas to contribute to the Dollar Otter community, please post below on how you saved for your emergency fund.