Start this year off right by starting an emergency fund. Many of us in our 20s forget the importance of saving for a rainy day. I would go so far as to say that a majority of Americans have forgotten about the importance of saving for an emergency. That's part of what got us into this economic mess we are in now. But that's another point for another day.
So why start an emergency fun? Its simple! Would you rather pay for a $1,500 car repair out of your everyday checking account or put it on a credit card. The smart answer is no!
Your everyday checking account should be for your everyday and reoccurring expenses. If you have to pay for that car repair out of that account then you have less money to pay for your everyday expenses. And when your 23 like me that also means less money to go have fun with. Not to mention you shouldn't be spending all of your money every month anyway. Its important to start saving for your more expensive long-term goals now rather than trying to come up with the money later.
For most people the question that stumps them the most when it comes to an emergency fund is how much to put away. Its not surprising that people have theses questions because personal finance experts still haven't come up with a magical number to save for an emergency fund. They probably never will either. It all depends on your unique situation. Some experts say 2-3 months worth of salary, others say 1,000-3,000 dollars. My opinion is that it should be somewhere in between 1,000 dollars and 3 months of salary. Your monthly expenses and your current situation all determine how much you should save.
I'm going to talk about this as if you graduated within the last few years and you have a steady job. If you live at home and don't pay rent you can afford to put less in your fund since rent would probably be your largest expense. If you do pay rent you need to save money for your rent and utilities. If you are completely on your own with no one to support your situation in case you lost your job your probably should save 2-3 months worth of rent. If you have family members who are willing to pay for your expenses for a period of time you could save less.
My suggestion would be to look at what your monthly expenses are and how much they are and come up with an amount that would allow you to pay for them for at least 1 month. For me I have few real monthly expenses so I can get by with about 1,500 in my account. When I do eventually move out I will definitely need to increase that amount.
Now what constitutes an emergency? Its not that new computer you desperately want or that "emergency" vacation." Those are not emergencies but you can save for those wants after you've reached your emergency fund goal. You should only use your emergency fund for a true emergency. Things like a major medical expense, a car repair that is needed so you can get to work, or you lose your job.
Where should you put your emergency fund? That depends on how much money you are going to save and how quickly you think you will need the money. If you are only saving a thousand bucks or so I would look into a high-interest savings account. Right now interest rates a dismally low thanks to the FEDs monetary easing policies. That said there are better rates out there if you look for them. Stay away from big national banks. They are offering the lowest rates of all and often have minimum balance requirements or fees to pay. Instead look into a local bank. Because they are smaller they have lower costs and can give you a better rate because of it. And they usually have better customer service than a big national bank.
Also look into your local credit union. These a not for profit banks that are owned by its members. Because they aren't out for a profit you can get a better rate. I prefer an online bank like Ally or ING. Because they don't have hundreds of branch offices they have lower costs and can offer you a better rate. I prefer them because they offer almost all of the same products and they offer many perks like no ATM fees in an attempt to attract customers from the larger banks.
If you are saving more than a few thousand dollars you might want to check in putting your money in a CD or Certificates of Deposit. Traditionally these products offer higher rates than savings accounts because its not as easy to access your money. You usually have to pay a few to withdrawal your money before the CD matures. Once again this economy has driven down CD rates making them comparable to savings accounts. However if you are savings a larger sum of money you may be able to get a better rate, especially at an online bank.
The moral of the story is set up a plan to save even 20 bucks a month and put it towards an emergency fund. Make sure you have enough money to cover yourself. Put it in a safe a place that you can access without to much fuss and try to find a product that will have your money working for you. Its a new year, time to start it off on the right financial foot.
I'm not personal finance adviser this is just what I know from what I've learned in my experiences and my own research.
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