How to Build an Emergency Fund
You know you should have an emergency fund or savings account, but maybe you’re not quite sure how to make that happen or what it involves. We have outlined the basics of an emergency fund and provided you with steps on how to start one.
What is an emergency fund?
An emergency fund is a savings account where you set aside money to cover large, unplanned expenses like home repairs, unexpected medical expenses, car repairs or even unemployment. An emergency fund can act as a back-up plan so you don’t have to rely on credit cards or high-interest loans when something unexpected happens.
How much should I save in my emergency fund?
The typical rule of thumb for an emergency fund is six months’ worth of expenses. The amount you will need will depend on your finances. If you lose your job, you can use money from your emergency fund to cover bills and living expenses. To calculate how much you might need, add up all of your expenses and start with that figure.
How do I start an emergency fund?
First, you’ll want to open a savings account that’s easy to access. You don’t want your funds tied up in an account that you can’t easily withdraw from once an emergency hits. Ideally, put your money in a separate savings account so you’re not tempted to withdraw that money for something other than emergencies.
Next, save! The best way to go about saving is to pay yourself first. Don’t wait until the end of the month after you’ve paid all your expenses to see what you have left to save. At the beginning of each month or when you get paid, set aside a certain amount for your emergency savings. Setting up an automatic transfer makes the process even easier.
How do I build my emergency fund?
There are several ways you can build your emergency fund. As mentioned above, setting aside a certain amount each month is a great place to start, even if you just start with $10 each pay period. To add even more to your savings, consider adding money from your tax return to your fund or saving any extra money that you receive.
You can also cut your budget to add more to your emergency fund. Cutting back on ordering takeout or giving up your daily coffee run will allow you to save more.
Saving a large amount of money can be intimidating. To make the idea of saving more manageable, set a goal that seems easier to reach, like $500 or $1,000. Once you hit your goal, come up with a new one to have something to work toward.
Saving for the unexpected is important. Having money saved can be the difference between making it through a hard time or going into deeper debt. Start your emergency fund now, and be prepared for the unexpected.