Saturday, October 1, 2022
Finance

How to Start an Emergency Fund


How to build an emergency fund
How to start an emergency fund fast

Emergency Fund Tips

We have all experienced an unexpected financial emergency at some point in our life.

An unplanned medical procedure, major car repairs after an accident, or a sudden loss of income can put you in debt and threaten your financial security if you’re not prepared. That’s why having an emergency savings fund is so important.

Your emergency fund is money you keep separate from the money you use for your regular household expenses. You do not use the money for anything other than a real emergency. Having an emergency cash reserve is part of a solid financial plan.

Why Build an Emergency Fund?

You should start an emergency fund because it will help you pay unplanned expenses without having to take out a personal loan or use high-interest credit cards. Building an emergency fund provides peace of mind and prepares you for unexpected expenses like medical bills or other financial emergencies.

Using a credit card for emergencies instead of having cash in reserve might solve some one-off problems like unexpected auto repairs. But relying on credit or taking on credit card debt to pay for an emergency expense is a bad idea long term.

If you suffer a job loss, putting all your basic living expenses and bills on credit cards until you find work won’t be sustainable. Running up a mountain of credit card bills while you look for employment is unwise.

How to Start an Emergency Fund

How to save for emergency fund

Here are 5 actionable steps for building your emergency fund:

1. Create a Budget

A budget is a spending plan for your money. Budgeting helps you determine how much you need to cover your monthly expenses. Knowing where your money goes will also help you spot opportunities to reduce your spending and free up extra funds to put toward your emergency fund.

Make sure you review your budget on a regular basis since bills, spending habits, and income can fluctuate. You may need to make adjustments to your current budget to accommodate changes.

2. Set an Emergency Savings Goal

Financial experts recommend having three to six months of expenses set aside as a rule of thumb. Once you know how much you spend on rent or mortgage payments, debt payments, food, bills, and discretionary spending, you can multiply your monthly expenses by six to get the figure to hit for a six-month emergency fund.

From that number, you can set your monthly savings goal. Divide the six-month total by the number of months you intend to save for it. That will give you the dollar figure you need to set aside every month.

3. Decide Where to Put Your Emergency Fund

The most important factor in deciding where to put your emergency fund is having easy access to your money when an unexpected emergency arises. Here are 3 places to put your emergency fund that offer stability, availability, and interest on your balance:

  • Savings account at your current bank or credit union connected to your checking account
  • Money market account that includes a debit card or paper checks
  • High-yield savings account at an online bank linked to your existing checking account

Savings accounts and money market accounts are good places to park your emergency funds. They are highly liquid assets that pay interest, though a money market account might require a higher minimum deposit to open. Online banks can offer much more competitive interest rates than brick-and-mortar banks due to having significantly lower overhead.

These accounts also give you fast access to your money. That’s important when you have to pay for a repair, bill, or replace a broken appliance immediately. You can typically withdraw without penalties or significant fees, as long as you stay above any minimum balance requirements.

Savings accounts and money market accounts are easier to manage than investing your rainy day fund into a certificate of deposit (CD), a mutual fund, or the stock market. CDs offer a fixed rate of interest for a specific period of time, but you’ll pay penalties if you need access to the money early. Stocks and mutual funds offer the potential for higher returns, but quick access and the risk of losing your principal make them inappropriate for your emergency reserve.

Maximizing your return is not the main financial goal for your emergency stash.

4. Automate Your Savings

Automation is the easiest way to build a savings habit and ensure you save before you spend. You can set these up to coincide with your paydays. You can also have your payroll department direct deposit a portion of your paycheck into savings and the rest to checking.

Don’t wait to see how much you have left at the end of the month to save. Some months you might save very little or nothing at all. Treat your savings as your most important monthly bill of all then pay it first. Once your automatic deposits are in place, you’ll be well on your well to creating that financial cushion.

5. Monitor Your Progress

After you’ve started building an emergency fund, review your plan at regular intervals. Determine if you’re on track to reach your goal and whether the plan is working for you.

If everything is going according to plan, you might consider increasing your savings rate. If you’re not on track, go over your budget and spending habits.

Make sure you also review your savings plan after any life changes or situations that necessitate tapping into your emergency cash savings.

Additional Tips for Building an Emergency Fund Fast

Ways to have emergency fund

Here are some ways to increase your savings rate and build your emergency fund faster:

1. Cut Spending

Review your budget and see if you spot any expenses that can be reduced or eliminated. There are usually at least one or two ways to cut non-essential spending in every budget.

Start with the easy wins. Maybe you could cut back on eating out or find cheaper entertainment options. 

Don’t forget your major expenses. If you can save on housing, reduce your food budget, get a better auto insurance rate, or lower your transportation costs, you’ll have additional funds to put toward savings.

You could do a no-spend challenge for 30 days. You might be amazed at how much you save when you limit your spending to just your essential living expenses for a month.

2. Sell Things You Don’t Need

You probably have things in your closet, basement, or attic you don’t need anymore.  You can get additional cash fairly quickly by selling your stuff.

There are plenty of apps for selling used furniture, you could have a yard sale, or you could sell your old clothes on Poshmark. Online platforms like Facebook Marketplace, Craigslist, and eBay also make unloading your stuff easy.

3. Boost Your Income

Reducing your expenses and living below your means are financially sound decisions. But there’s a limit to how much you can shave off your budget. You’ll never get your living expenses down to zero.

There’s no real limit to how much extra money you can earn, however. Cultivating a second income source does require time and energy. Earning an extra $200 a month is just as effective as cutting $200 from your budget.

To make more money, you can ask for a raise, use your existing skills to freelance, work extra shifts, or try something like driving for DoorDash. You could also get a second part-time job for an extra income stream. 

If you can earn more money, you’ll be better prepared for that next financial surprise that wasn’t part of your monthly budget.

4. Try Increasing Your Savings

Once you slash your expenses or increase your earnings, act like you didn’t. Put the extra cash right into your emergency fund.

You can also try making a slightly higher contribution to your contingency fund and see if it affects you. For example, if you’re putting $100 aside every payday, try $120. You might not notice it at all, but your savings grow faster.

5. Save Any Windfalls

If you get a tax refund, year-end bonus, rebate check, cash gift, or inheritance, put it toward your emergency fund. Since you don’t account for these extra infusions of cash in your household budget, you can bank the entire amount without missing it.

If you get paid biweekly, twice a year you get three paychecks in a single month. During those three paycheck months, if you stick to your normal budget based on getting two paychecks, you can save an entire paycheck.

Saving for an Emergency Fund

You can’t plan for everything, but you can anticipate facing unplanned expenses in the future. Having a reserve of cash in a separate savings account you only use for true emergencies can prevent financial ruin and keep you on track toward your goals. Once you have an adequate emergency fund, you can turn your attention toward other financial goals, such as building a nest egg for retirement.

More From Kinda Frugal

Emergency Fund Examples

Sinking Fund vs. Emergency Fund

How To Create Your First Budget

Image Credits: Unsplash



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