How to Build an Emergency FundApril 26, 2023
Emergency funds provide you with a solution for unexpected expenses like home or auto repairs, large medical bills or job loss. Without an emergency fund in place, these expenses could require using credit cards or borrowing money in order to cover them.
While saving for an emergency fund may seem intimidating, there are a few strategies you can employ to start building one.
Set a Goal
Goal setting can help to put your mind at ease and keep you focused on why and what you’re saving for, particularly when creating an emergency fund. Having savings goals in mind is particularly useful when working towards creating one.
Step one is creating a budget. This will enable you to track where your money is being spent, and how much savings space there may be each month.
As a rule of thumb for single-income families, an emergency fund should contain three months’ of living expenses; families with dependents or more extensive expenses should aim to save six months’ of expenses in an emergency fund.
After you’ve determined your savings amount, it is time to start making regular deposits into your emergency fund account. Doing this will make it easier to stay on track without succumbing to temptation to skip a payment.
Cut Back on Unnecessary Expenses
Although cutting back on some non-essential spending may seem difficult, doing so can help build your emergency fund and alleviate stress while increasing financial security.
Begin by reviewing your current spending habits and making changes where money is going unnecessarily down the drain, for instance how much is spent each month on dining out.
Reduce food and transportation expenses can make a substantial contribution towards building emergency savings.
Save at least three to six months’ of living expenses in an emergency fund so that if something unexpected comes up, you have enough funds available.
Once you’ve saved at least this amount in an emergency savings account, it is wise to use any unexpected windfalls such as tax refunds or holiday bonuses as additional funds to increase it quickly. While investing the funds may tempt you, keeping them liquid may help quickly boost emergency savings accounts.
Automate Your Savings
Automating your savings is an ideal way to avoid decision fatigue and ensure consistent savings on a consistent basis, no matter how busy life gets.
One effective strategy to create an automatic savings habit is setting up automatic transfers from your checking account into an individual savings account. Some banks will even transfer money every month, bi-weekly or weekly!
As your circumstances change, it’s important to adjust the amount of your savings deposit accordingly. You might need to reduce them in order to cover a larger credit card bill or increase them in order to take advantage of an exciting new opportunity.
One of the best things you can do for your financial health is setting aside an emergency fund, which contains money that can cover unexpected expenses like medical bills or car repairs.
Psychologically, knowing you have enough money saved up for an emergency without going into debt can give a psychological boost. Financial experts suggest setting aside three to six months’ expenses in an interest-bearing savings account for emergencies.
Setting up automatic transfers between your checking account and savings or money market accounts is the perfect way to set aside money on an ongoing basis and reach your savings goal more quickly.