How to Build an Emergency Fund

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What is an emergency fund?

An emergency fund is the money you have set aside for unexpected expenses such as a job loss, major home repair, unexpected medical emergency, or a car wreck.  An unexpected expense can cause more stress and anxiety.  Having an emergency fund provides peace of mind when there is an unexpected expense because you know that the money is available to take care of the problem.

As much as I would hate to have an emergency, I understand that An emergency can happen at any time.  It is an awful feeling when an emergency arises and there is no money available to pay.  Rather than use a credit card and go deeper into debt, it is best to save and have money available for when the unexpected happens.

According to Bankrate financial security index survey, only 40 percent of Americans would pay an unexpected $1,000 expense, such as a car repair or emergency room visit, from savings.  More than a third would need to borrow the money in some way – either with a credit card, personal loan or from family or friends.

We don’t want to be part of the statistics.  We all need a safety net to help us handle whatever comes our way.  An emergency fund creates that safety net.

Set a goal

You may be wondering how much you should save.  That answer varies depending on who you ask.  I don’t believe there is one answer to this question because everyone’s expenses and situations are different.  It is entirely up to you to decide how much you want to save. 

However, if you are starting with zero dollars, I will suggest you start with a goal of $1,000.  When you get to $1,000, don’t stop there, continue saving.  Although I recommend $1,000, you don’t have to start with that amount.  Decide what makes you feel comfortable and when you reach your goal, set another goal and continue saving.

Remember to set a realistic goal. An unrealistic goal that is difficult to reach, will lead to discouragement. 

Open a savings account

I don’t recommend putting your emergency fund in your checking account or a savings account linked to your checking account.  You want to be able to easily access the money in case of an emergency but not such that you are able to withdraw or transfer money at any time. 

I recommend opening an online savings account because:

• It is free to open a savings account
• There may be a bonus for opening a new account
• There are no fees
• You can transfer money easily
• It takes 2-3 business days to transfer money into your regular account

If you don’t want to open an online savings account, try another bank or a credit union. Look for:

• A savings account at a different institution than your checking account.
• There are no fees
• No minimum balance required
• Compare interest rates

Open a savings account that is not so easily accessible. 

From experience, I will not recommend having an emergency fund account tied to your checking account.  It is easy to access that money with your debit card.  My emergency fund savings account is at a bank that has few branches (I did not initially know this), plus I declined to have an ATM card.  To withdraw money from this bank, I would have to drive 45 minutes, that is inconvenient.   

Automate your savings

I hope you already have a budget in place.  Look at your budget and decide on the amount you plan to save each week or month.  It is important that you choose an amount you can afford.  Then pick a day that the amount will be automatically transferred from your checking account to your savings account.

Automating the savings guarantees that the money will be transferred.  If you have to make the transfer yourself, you could forget or there may be things that come up that may seem more important.  It is best to remove yourself from the equation because it is easy to get sidetracked.

Once you automate your savings, you will reach your goal and still continue to save because you have now developed a savings habit.

Save more

As time goes by, save more.  If you received a raise or promotion, you can increase your savings.  Take a look at your budget and find ways to cut your expenses and increase your savings.

 If you received a raise, I recommend increasing your savings by the same amount.

Why?

If you were living comfortably with what you were making before the raise, why increase your expenses?  At least try for a few months to save the increased amount, and if it becomes a strain, reduce the amount.  It should be a joy to save and not a burden.

Save 6 months of living expenses

Don’t stop saving after you reach your initial goal.  Continue saving until you have enough to cover 6 months of your living expenses.  This may seem like an unattainable goal, but you can reach any goal you set, provided you stick to your plan. 

Think about the peace of mind you’ll get knowing that you have that money in the bank.  Remember that an emergency fund is there for when the unexpected happens. 

Start planning now for an emergency by getting on a budget and putting a plan in place for when an emergency happens. Once you begin saving, you will be amazed at how fast your money will grow. 

Your turn, have you started saving for emergencies?

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