You know you should have an emergency fund, but that’s easier said than done.
How much money are you supposed to save? What exactly is this fund used for? And how do you balance setting aside money with those student loan bills (sometimes big ones) that need to be paid now?
Emergency funds don’t have to be confusing, and they don’t have to derail you from your other financial priorities. Here’s what you need to know to start your own.
What’s an Emergency Fund, and Why Do I Need One?
First, let’s start with what an emergency fund is not.
An emergency fund is not something you tap into when you need to pay occasional bills like vacations, holidays, your annual car registration or your trip to the dentist every six months. These things may not be regular expenses, but they’re still expenses you can anticipate, and you should be accounting for these in your monthly budget.
If you know your annual trip to Las Vegas will cost $X, divide that number by 12 to get the amount you need to set aside monthly for this goal. Put that into an “irregular expenses” savings account.
Your emergency fund is for true emergencies—unforeseen scenarios you couldn’t anticipate, such as a sudden job loss or huge health crisis.
An emergency fund can be a lifesaver in these situations. If you get sick, get laid off, or face a sudden car or home repair bill, this safety net will become your saving grace.
Murphy’s Law isn’t just a clever cliché; life has a way of throwing unexpected costs at us from time to time. If your car’s engine dies two weeks after you get laid off, you’ll thank your lucky stars that you saved up for this type of calamity.
In short, an emergency fund cannot only save your budget, it can give you some peace of mind (which is every bit as valuable).
How Much Should I Save?
Financial gurus recommend different amounts.
TV personality Suze Orman recommends saving up enough money to cover 8 months‘ worth of expenses.
Many financial experts shoot somewhere in the middle, saying you should err as close to the 6-month side of that spectrum as possible. (When it comes to establishing financial security, more money is always better than less.)
Whatever number you choose to strive for, it’s worth noting that experts disagree over whether your calculations should cover all of your expenses during those months or just your “necessary” expenses.
Are you talking 3-6 months of dining at posh restaurants and going to the movies, or 3-6 months of strictly groceries, utilities, and other non-luxury items? Is cable TV included? What about your gym membership?
The answers to these questions are up to you to decide. If the worst happens and you lose your job, you may choose to cut back drastically on non-essentials to make your money stretch as long as possible.
Or you may save up a little more now to give yourself more breathing room and allow yourself to indulge (in moderation) during times of crisis. Decide on your personal must-haves and plan accordingly.
Emergency Fund vs. Student Loans: How Do You Prioritize?
There’s one question we haven’t yet answered: How do you juggle building an emergency fund with paying down your student loans?
First and foremost, you must make the minimum payment on your loans. Never skip payments (but that should go without saying). But how should you balance building an emergency fund with making additional payments to accelerate your loan payoff?
Going back to the gurus, Dave Ramsey recommends saving $1,000 in an emergency fund first, then focusing on repaying your debt, and then building your emergency fund more to cover 3-6 months of expenses. It’s a back-and-forth strategy that balances both priorities against each other.
However, note that Dave heavily prioritizes paying off debt compared to other financial goals. With this in mind, you’ll have to decide for yourself if that’s what makes sense for you.
Others argue you should save a bigger emergency fund right off the bat—maybe 2 months’ worth of expenses to start — then make additional payments on your loans. Once your loans are repaid, build your emergency fund to the six-month mark.
The interest rate on your loans will play a role your personal decision. Paying down subsidized Stafford Loans is different than repaying private loans with 10% APR. If you’re paying a large amount in interest each month, you may choose to start with a smaller emergency fund so that you can focus on getting rid of high-interest debt.
Whatever you decide, one thing is clear: an emergency fund should definitely be part of your short-term and long-term financial plan.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 6.97%1||Undergrad & Graduate|
|2.47% – 6.99%3||Undergrad & Graduate|
|2.68% – 8.77%4||Undergrad & Graduate|
|3.24% – 6.66%2||Undergrad & Graduate|
|2.61% – 7.35%5||Undergrad & Graduate|
|3.01% – 9.75%6||Undergrad & Graduate|