As a recent college graduate, you’re entering a totally different period of your life. It’s a very exciting time, but it comes with a lot of challenges, particularly related to your personal finances. In this post, we’ll dive into one of the most important aspects of financial stability and working towards financial independence: building an emergency fund.

The Importance of an Emergency Fund

An emergency fund is your financial safety net, ready to catch you if you fall into unexpected financial turmoil. You never know what life will throw at you. From a sudden car repair to medical bills and unexpected layoffs. We’ve seen in the past few years with Covid and mass layoffs in Tech and other industries, that we can’t be complacent with our financial security. An emergency fund can help shield you against having to take out loans or selling off your investments while the markets are down. This can bring you peace of mind and a buffer during these financial shocks. But be sure to keep in mind that your emergency fund should only be used for necessities. During a genuine emergency, this is even more important so that your emergency fund can last as long as possible. Once you have an emergency fund set up you can freely invest your money and work towards financial independence with a solid foundation and without worrying about the implications of a financial downturn.

Setting Up and Budgeting for your Emergency Fund

Building your emergency fund is a simple task in theory, but it is not always the easiest. Getting started as soon as possible is always helpful. Aim to allocate a portion of your income to your emergency fund, even if it’s a very small percentage. The target amount for this fund should be around three to six months of necessary living expenses. This can be more or less depending on your specific situation, and whether you have people to support or people that can help you out. Don’t be discouraged if you can’t fully fund your emergency fund right away or even in a few months, every dollar counts.

In order to actually build up your savings, you need to budget. Track your income and expenses every month and identify areas you can cut back on without tanking your quality of living. Save and invest the extra dollars you save every month. There are many different budgeting methods that will be discussed on this blog in later posts. But, a good starting point is to simply dedicate a percentage of your income towards savings every month, and live on the remainder. You can further enhance this by either setting up part of your direct deposit to go into your savings account, or by automatically transferring a portion from your checking account.

Picking the Right Account

There are a few important things to consider when picking the account for your emergency fund. You want your emergency fund to be very easily accessible whenever you need it, but also separated and restrictive enough to prevent you from needlessly tapping into it. A savings account strikes the right balance between accessibility and separation. Consider opening a new account just for the purpose of storing your money. Most importantly, make sure that you open a high yield savings account, which is a savings account that has a much higher interest rate than traditional savings accounts.

Currently banks like SoFi, Ally Bank, Marcus by Goldman Sachs, etc., have high yields savings accounts offering 4.5% and above. This will make sure that your money is still very accessible and not at risk of losing money, while still allowing your money to grow a little bit, as opposed to losing value to inflation sitting in a checking account or a traditional savings account. The concept of compound interest also applies to interest rates working against you, such as inflation. So we want to make sure that our emergency fund loses as little value per year as possible.

As we venture out into the real world, having financial stability is extremely important. Building a healthy emergency fund is a great first step towards financial stability as well as financial independence. The peace of mind and stability that comes with being prepared for any financial or life emergency is unbeatable. It’s a valuable investment in your future that will allow you to navigate life’s challenges and uncertainties with confidence.

Disclaimer: The content provided on this blog (Zooming to Fire) is for informational and educational purposes only. It represents the opinions and perspectives of the authors and should not be considered as financial advice. The authors are not licensed financial advisors, and no content on this blog should be in any way interpreted as professional financial counsel or advice. See more here.