Why an Emergency Fund is Necessary
Once you complete your degree and land a job, the real work begins. If this is the first time living on your own, the thought of pulling in a regular paycheck may lead you to plans for weekend trips, decorating your apartment, and enjoying dinner with friends. While that is certainly possible, there are other areas where you should direct your spending, and one of the most important being an emergency fund.
Why You Need an Emergency Fund
An emergency fund helps you cover your living expenses if you lose your job or your hours are cut, as well as pay for unexpected expenses such as auto repairs. Setting money aside for these expenses isn't fun or glamorous, but when the time comes you will be happy to have it. The general rule of thumb is to have enough money set aside to cover between three- and six-monthsÂ’ worth of expenses. If that seems too aggressive on your entry-level salary, start with the goal of setting aside $1000 and go from there.
Finding Extra Funds
There are a few ways you can come up with the money you need for savings. Taking a hard look at your budget is always an option, but you don't want to cut out all discretionary spending. Just like an overly strict diet, over the top budgeting will eventually lead to rebellion. Look at your expenses for ways to save. One cost that you have probably just added to your budget is repaying your student loans. If you have been paying that bill without questioning whether there is a better deal available, you may be in luck.
In just a few minutes, you can take steps to save money both monthly and over the life of your loans. Just because you signed up as a student doesnÂ’t mean you are stuck with the terms forever. Refinancing at a lower rate can save you money each month. You can also use this lower rate to shorten the life of your loans. The application process is quick, and you can see the interest rate you qualify for before committing.
Should This Be Your Only Savings Account?
Your emergency fund should not be your only savings account. It is money you have set aside for emergency use only. The traditional advice is to put the money in a high-yield savings account, although the same low-interest rates that help you save money on your student loans will lower the interest rate on savings accounts. Even with the low-interest rates on savings, don't be tempted to put your emergency fund in other investments, such as a certificate of deposit or investment account. These funds must be liquid and easily accessible.
Once you are satisfied that you have enough in this account to cushion against job-loss or unexpected expenses, you can work on saving for other goals. By saving money for an eventual down payment on a new vehicle, potential veterinary bills, or other expenses that will occur sometime in the future, you reduce your need to dip into your emergency fund each time something unexpected occurs.