In college, the financial circumstances of each of your classmates can be vastly different from your own. Some college students depend on their parents to pay for their cost of attendance. Some rely on scholarships and financial aid. Others are dependent on student loans or income from their own job or to pay for their education. However, college students need to be good money managers regardless of the source of the funds. In addition to creating a budget for regular expenses, students should build a college emergency fund for unplanned expenses.
1. You'll have a safety net for unexpected expenses
When you add tuition, textbooks, meal plans, and fees on top of the cost of living, the student lifestyle can become very expensive. There are some tricks to reducing some of the necessary costs, like attending a community college for your general education courses, but there are also times when you have to spend money you didn’t plan for. In order to stay on the financial track to graduate and combat these unexpected expenses, it’s a good idea to have some emergency savings set aside.
An emergency fund is a separate savings account designated specifically for emergencies or unexpected expenses. Your college emergency fund will act as a financial safety net, allowing you to dip into the fund when the need arises and replenish the fund as necessary. This emergency fund can be helpful in situations where your laptop crashes, you need an additional textbook to succeed in a course, or you have urgent medical bills to cover.
2. You'll have a head start on saving money for your emergency fund
When you first start an emergency fund, it’s wise to separate the fund into a different bank account. A distinct emergency savings might prevent you from dipping into the fund more often than you should. This separate account could be in the form of a money market account, which could help you earn high interest on the money you’ve put aside, or a regular checking account. Whenever you run into extra money, such as a gift or student aid refund, you can add extra padding to your emergency savings. Besides sporadic contributions, you should add to your fund regularly to ensure that your routine savings are becoming a good money habit.
The ultimate financial goal for an emergency fund is to have three to six months worth of living expenses saved up. If you have a part-time job, simply automate a certain amount to be taken from each paycheck. If your income fluctuates weekly, try saving $10 per week. Even something as small as $10 per week adds up to $500 after a year. You could also try a fun savings challenge to help you reach your emergency savings goal.
3. You'll learn what qualifies as a emergency expense
Having an emergency fund should be your first step, but knowing when is the right time to use it comes with experience. There will be times during your college career where your friends want to eat out for the third time in a week or desire to travel over spring break. While it may be tempting to borrow from your emergency fund, these examples are not emergencies.
The purpose of your college budget is not only to set aside some funds for fixed expenses (your rent, a car note, college tuition, etc.), but also your variable expenses (entertainment, gas, clothing, etc.). If you know your friends have a habit of eating out, make a restaurant category in your monthly budget. If you want to go on a spring break trip, start saving money for the vacation months in advance.
So, when is the right time to use the fund? You should use your student emergency fund when the expense satisfies both the element of surprise and is a necessity. A death in the family, car repairs from an accident, or losing your job all qualify as both unexpected and a valid reason to dip into your fund.
4. You'll build money habits that will benefit you long after you graduate
As a college student, putting money aside each week for an emergency that might never happen may seem overly cautious. However, when you prepare for unexpected expenses in the short-term, you put yourself in a better position to handle emergencies, like home repairs or vet bills, later in life. Having an established emergency fund will prevent you from having to utilize a credit card or a loan for an unexpected expense.
Your finances may be limited as a student; however, a college emergency fund can help you combat financial instability better than those students without an emergency fund. In fact, a 2018 report from the Board of Governors of the Federal Reserve System found that even most U.S. adults would have trouble handling an emergency expense of as little as $400. With your student emergency fund, you’ll be able to handle a little bit of adversity and develop good financial habits that will carry over into life after college.
Now that you know what an emergency fund is and why it’s important, it’s time to set up an account to hold the funds. Creating an emergency fund category in your budgeting app (and allocating money to it) can help prepare you for almost any emergency that comes your way. Having an emergency fund is a crucial step in planning for financial emergencies. It is a tool to make dealing with emergencies or unexpected costs less difficult. Building an emergency fund in college takes discipline and responsibility, but after it’s established, you’ll be on the right track to achieving sustainable financial security.
🚨Stuck between adding to your emergency fund and reducing a debt? Check out Paying Off Debt vs. Saving Money (How to Decide).
🏁Reach your emergency savings goal faster by reading 30 Money Saving Tips to Master in College.