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Emergency Fund – What Is It and Why You Need One

Emergency Fund – What Is It and Why You Need One

Megan Seamans Megan Seamans
3 minute read

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While we often believe that nothing bad will ever happen to us, it's crucial to be prepared for the unexpected, especially when it comes to your finances. Establishing an emergency fund is a fundamental step toward a healthy financial situation. The idea seems straightforward, but understanding the why and how can be more complex. Vibe Credit Union is here to go over all things emergency fund – what it is, when you may need one, how much to set aside, and how to start one.

What is an emergency fund?

Simply put, it's money that is set aside to cover sudden expenses or financial emergencies. Its purpose is to reduce stress and cover unexpected costs, serving as a safety net if life throws you a curveball.

When should I use my emergency fund?

It's important to define what situations you consider emergencies and set guidelines for when and how the money will be used. We've gathered some suggested scenarios that may require your emergency savings, but keep in mind that your financial situation is personal, and it's up to you to define your boundaries.

  1. Lost Job: If you're laid off or fired, it can be used to pay essential bills such as rent, food, and gas.
  2. Income Reduction: Whether due to reduced hours, a lower salary, or choosing to work less for personal reasons, this fund can help make ends meet temporarily.
  3. Medical Emergency: Even with good insurance, medical costs can add up. An emergency fund can help cover expenses not covered by insurance, such as housing, food, and income loss.
  4. Emergency Repair: Unexpected repairs, such as car, furnace, or appliance repairs, can be covered, preventing additional debt from piling up.

How much money do I need?

It's generally recommended to keep enough to cover at least 3 to 6 months' living expenses in your emergency savings. This amount can seem overwhelming if you're just starting out, so begin by setting smaller, achievable goals with plans to grow your funds over time. If you're unsure, there are various calculators available to help you get started.

How do I create an emergency fund?

  1. Establish Your Budget: and how much you will contribute. Leave room for changes in the future and plan to increase your contributions as your salary or living expenses increase. Set up as many automations as possible to streamline this process.
  2. Choose the Right Account: Look for an account that maximizes your funds. Vibe Credit Union's High Yield Savings Account is an excellent choice to maximize your earnings with no minimum balance.
  3. Establish Usage Scenarios: Define specific scenarios in which your emergency fund can be used, such as essential expenses during job loss or salary reduction. Doing something as simple as creating a list of essential expenses in case of the unknown can keep you from dipping into your account unnecessarily.

Emergency funds are not just for financial support; they offer peace of mind in any circumstances and are a vital aspect of a healthy financial situation. Ensure you and your loved ones are covered by saving up for the unexpected.

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