THE BLOG

Why You Absolutely Need an Emergency Fund

03/07/2013 11:11 am ET | Updated May 07, 2013

One important step in preparing for your future financially is building up an emergency fund. I heard an interesting story on NPR on the subject, "Study: Nearly Half In U.S. Lack Financial Safety Net." It emphasized the importance of saving up an emergency fund and the fact that far too many Americans still don't have one. An emergency fund must be in place before you can be effective with many other aspects of your finances.

If you're not convinced, here are three reasons why setting up an emergency fund is important:

1. You have something to fall back on when an unexpected expense arises.

2. You avoid going into debt or pulling from retirement accounts if you are in need of funds.

3. You have peace of mind that if something were to happen to your job you could maintain your lifestyle (for a given period of time).

Getting Started
You might have heard the general rule of thumb about an emergency savings account; set aside between 3-6 months of necessary expenses. Some of my clients feel more comfortable with a years worth on hand, and that's ok too. Be sure this money is accessible; put it in cash or a short-term savings vehicle. That is important because you want to be able to withdraw it today if necessary, and be sure it won't lose value.

It's not always easy to start an emergency savings account, and some folks are trying to change that, which I'll get to in a moment. Even if you only have a few hundred dollars to set aside that is a very important first step. If you just added $20 per week to your emergency account, after a year you'd have $1,040.

Rewards for Saving
Fortunately, there are things being done to promote savings and help people get ahead. Of course, SaveUp is one example, not only are they rewarding people to save, but some of their prizes are focused on the establishment of emergency savings such as a "Rainy Day Fund" worth $25,000 or a "Deposit to Savings" totaling $50,000. SaveUp's model is similar to prize linked savings mentioned in the NPR story. Prize linked savings is offered though some credit unions and you have the chance to win a grand prize when you save.

Other states and organizations are catching on too. Maryland has established a program called Maryland Cash. They partner with a variety of both public and private organizations to help working families establish financial security. The Corporation For Enterprise Development wants to help low-income Americans achieve the American dream and works with federal, state and local governments to form policy which will do so.

You can do your part by personally making emergency savings a priority, and of course, continue to SaveUp!

This post was written by SaveUp's personal finance contributing writer, Catherine Hawley, CFP.