Building a comprehensive budget and savings plan is critical for long-term financial health. Your savings plan should take into account all aspects of your life, including your current bills, debt payments (like credit cards and loan payments), future goals (vacations or a new home), and also importantly, the unexpected (hospital bills or major home repairs). For the latter, setting up an emergency fund is necessary.

In a 2023 survey, 57% of Americans reported they couldn’t afford a $1,000 emergency expense. This statistic is an important reminder of the value of establishing an emergency fund. After all, an emergency fund can ensure that you don’t turn to high-interest debt when unexpected financial setbacks come your way. 

Below, we’ll dive deeper into the importance of emergency funds and why you should start building one now. 

 

What is An Emergency Fund?

An emergency fund is an amount of money you set aside to use for emergency expenses, such as unexpected:

• Car repairs
• Home repairs
• Medical procedures
• Urgent travel
• Unemployment

Most financial experts recommend saving at least three to six months of living expenses in your emergency fund. This way, you’ll be able to weather financial storms, including temporary job loss, without relying on credit cards or high interest loans. 

 

Benefits of Having an Emergency Fund with a Credit Union

Setting up an emergency fund has many benefits, especially if you establish one with a credit union. 

Some of these benefits include: 

• Avoiding high-interest debt – As we’ve touched on already, having a stash of cash set aside can keep you out of credit card debt. Credit cards charge compounding interest, so their balances can quickly spiral out of control.
• Protecting your retirement funds – If you contribute money to an individual retirement account (IRA) or 401(K), you should do your best to keep it there until you reach retirement age. Pulling money from your retirement accounts can result in hefty penalties and adverse tax events. When you have a healthy emergency fund, you can pay for unexpected expenses without withdrawing money from your retirement accounts. 
• Reducing financial stress – Without a financial cushion, unexpected expenses can be incredibly stressful. Your future self can enjoy greater peace of mind if you start saving up an emergency fund today.
• Having more motivation to save – With online shopping and food delivery, there are many tempting ways to spend money these days. If you don’t have a set goal in mind, you may forgo building savings altogether. By establishing an emergency fund, you can reinvigorate your motivation to save and make strides in your financial security. 
• Enjoying the advantages of credit union membership – As not-for-profit organizations, credit unions are invested in the long-term financial success of their members. Credit union members often enjoy higher savings rates, lower fees, and more personalized customer service. For these reasons, opening your emergency fund with a credit union can help you maximize your savings over time. 

 

Investing in Your Emergency Fund

Selecting the right type of savings account is important when setting up an emergency fund. The most important qualities to look for include:

• Separation – It’s important to store your emergency fund separately from your everyday checking and savings accounts. Otherwise, you may struggle to track your savings progress or dip into it for non-emergency expenses.
• Security – Next, you want to choose a financial institution that is safe and secure. Credit union deposit accounts are insured by the National Credit Union Administration (NCUA)—which offers the most comprehensive protection.
• Liquidity – When financial emergencies strike, you don’t want to deal with withdrawal delays or penalties. Instead, you want to be able to access your cash at a moment’s notice.
• Interest – Lastly, it’s beneficial to find an account that will help you grow your balance faster by paying a high interest rate. 

 

Best Places to Store Your Emergency Fund

With these factors in mind, here are the best types of accounts to use for your emergency fund: 

• Traditional savings accounts – Traditional credit union savings accounts are easy to set up and they come NCUA-insured. They provide you with a secure place to store your money and earn some interest on it. On average, they offer interest rates of around 0.25%.
• Money market savings accounts – Money market accounts offer higher interest rates than standard savings accounts—sometimes as high as 4%. In exchange, money market accounts require you to maintain higher balances. You may also have to limit your account transfers and withdrawals to six times per month. 

No matter which type of account you prefer, credit unions will likely offer higher savings rates and charge fewer fees across the board, making them a more attractive option than big banks. 

 

Common Mistakes to Avoid When Building an Emergency Fund

If you’re going to set up an emergency fund, you want to do it right. Otherwise, your hard work may not pay off as expected. Here are three common mistakes people make when establishing an emergency fund:

1. Selecting the wrong storage location – The following storage locations are ill-suited for emergency funds:
   • Checking accounts – Checking accounts are meant to facilitate convenient, day-to-day transactions, not generate interest. As such, they’re not the best place to store your emergency fund. 
   • Certificates of deposit (CDs) or Term Share Certificates – These enable you to store money for a set period, such as one year or five years, in exchange for a higher savings rate. While they can help you grow your money faster, they’re less liquid than savings accounts. If you need to withdraw your money prematurely in an emergency, you may face costly penalties and forfeit your interest earnings.
   • Retirement accounts – Since withdrawing money early can result in prepayment penalties, retirement accounts are not ideal locations for emergency funds. 
   • Stocks – It’s tempting to throw all of your extra savings in the stock market account to see if it will grow. While stocks have the potential to earn an impressive annual return in the long term, nothing is guaranteed. Thus, investing your emergency fund in stocks is a risky move. 
   • Cash – Cash may be liquid, but it’s also vulnerable to loss, theft, and physical damage.
2. Failing to fund it sufficiently – Your emergency fund won’t do you much good if it’s empty. In order to fund it, you may have to employ some dedicated budgeting techniques until you reach your savings goals. After creating a savings plan, you can make the process easier by setting up automatic monthly transfers to your emergency fund. You’ll also want to replenish your fund as soon as possible after making emergency withdrawals. 
3. Using it for non-emergency expenditures – Emergency funds should only be used for true emergencies. If you want to save up for a big purchase or vacation, you can always set up another goal-specific savings account. 

 

A healthy emergency fund can help you secure your financial future. If you want to reap the rewards of an emergency fund, the best time to start saving is now.