No one ever plans on experiencing a financial emergency, but they happen to all of us at some point or another. When they do, it's crucial to have a solid plan in place to help you recover as quickly as possible. One great way to do that is by building an emergency fund. This dedicated savings account will give you peace of mind knowing that you have a cushion of money available if and when you need it most. In this blog post, we'll discuss what an emergency fund is and how you can start building one today.
What is an emergency fund and why do you need one
An emergency fund is a pool of money that you set aside for unexpected expenses. Many financial experts recommend having an emergency fund that covers three to six months of living expenses. The goal is to have enough money saved so that you can weather a financial storm without going into debt.
There are many reasons why an emergency fund is important. First, it helps to protect your credit score. If you have a good credit score, you'll be able to qualify for lower interest rates on loans and credit cards. This can save you thousands of dollars over the life of a loan. Second, an emergency fund gives you peace of mind. Knowing that you have a cushion to fall back on can help reduce stress during difficult times. Finally, an emergency fund can help you avoid expensive late fees and other penalties. If you're unable to pay a bill on time, having an emergency fund can give you the flexibility to pay it when you're able.
While there are many reasons to have an emergency fund, it's important to remember that it's not intended to be used for everyday expenses. Ideally, you should only tap into your emergency fund in the case of a true financial emergency, such as a job loss or major medical expense. With careful planning and discipline, an emergency fund can give you the security and peace of mind that you need to weather any financial storm.
How to start building your emergency fund – The Strategies
Now that you know why you should build and keep an emergency fund, let's talk about how to build one for yourself and your family. The strategy to build one depends on various individual factors, but here are our go-to strategies that work again and again.
Strategy #1: Set goals
The first step always needs to be evaluating the status quo (where you actually are) and where you want to go. Determine how much you need to save based on your unique circumstances. Are you single with no dependents? Do you have a partner and/or children? Do you own a home or rent an apartment? Answering these questions will give you a better idea of how much money you'll need to cover your expenses in the event of an emergency.
Once you have a goal in mind, break it down into smaller, more manageable pieces. For example, if your goal is to save $20,000 in two years, that's $833 per month. Or, if you want to save $500 in one month, that's just over $16 per day. By breaking your goal down into smaller chunks, you'll make it feel more achievable and be less likely to get discouraged along the way.
Strategy #2: The Savings Habit
How do you eat a whole cow? Steak by steak. If you constantly put money away, building an emergency fund becomes a lot easier. If you've not yet adopted the mindset of saving regularly, here are some key tips to create a savings habit that will lead to your goal:
- Know your why: Why are you saving? What do you hope to achieve? Having a specific goal in mind will help to keep you motivated. Knowing your why is always the best motivation, not only for creating and maintaining a savings habit.
- Start small: If saving feels overwhelming, start with a smaller amount and increase it over time. $50 per week may feel more manageable than $200 per week. The key is to get started and build momentum.
- Make it automatic: One of the best ways to make saving easier is to automate it. Have a fixed amount transferred from your checking account to your savings account each week or month. This way, you won't have to think about it—the money will just automatically be there.
- Monitor your progress: Keep track of how much you're saving each month. This will help you to see your progress and keep you motivated to continue saving. Saving regularly is one of the best ways to quickly build up your emergency fund. By setting aside even a small amount each week, you'll be well on your way to reaching your goal.
- Celebrate successes: That's a big motivator for building any habit. When you reach a milestone—like saving $500 or $1000—give yourself a small reward. This could be something as simple as buying a new book or going out to dinner. The key is to celebrate your successes, no matter how big or small, to keep yourself motivated.
Strategy #3: Cash Flow Management
Cash flow management is an essential skill for anyone, but it's especially important if you're working to build up an emergency fund. By getting a handle on your spending and creating a plan for your money, you'll be in a much better position to reach your savings goals. Cash flow management means to get the timing when money comes in and leaves perfected.
The first step is to get to know your spending habits. Track where you are spending your money for at least one month if not two. This will help you get an idea of where your money goes and what areas you may be able to cut back on. For example, find the due dates of your utility bills, insurance premiums, and other fixed expenses like your credit card.
Once you have an idea of your spending, you can start to put a plan in place. When you know that you're running short at the end of the month, you can deal with this situation by adjusting the due dates accordingly. You can then use the weeks when you have more money coming in to make a bigger dent in your savings goal and cover expenses.
By getting a handle on your cash flow, you'll be able to better manage your finances and reach your goal of building an emergency fund.
Strategy #4: Use One-Time Opportunities
Tax refunds or annual bonuses are often thought of as one-time opportunities. However, you can also use them to help you reach your savings goals. If you know that you're going to receive a large sum of money, consider using it to make a dent in your emergency fund. The same goes for any other one-time windfalls like an inheritance or a financial gift.
Saving a one-time opportunity is a great way to quickly boost your emergency fund. However, it's important to keep in mind that you shouldn't rely on these opportunities to fund your entire savings goal. Instead, think of them as a way to give you a head start or help you reach your goal more quickly.
Strategy #5: Automation Is Your Friend
This is maybe the easiest way to contribute to building your emergency fund: make it automatic. You can do this by setting up a recurring transfer from your checking account to your savings account. This way, you won't have to think about it—the money will just automatically be there.
Another option is to use a service like Digit, which connects to your checking account and saves small amounts of money for you automatically. This can be a great way to boost your savings without feeling the pinch too much.
The pitfall you need to avoid is called overdraft fees here. This strategy ties in with cash flow management, so make sure to check your balance and set up the right amount to be transferred over at the right times.
Strategy #6: Us Your Paycheck
Another great strategy to get money into your emergency fund is by splitting up your paycheck. When you get paid, automatically send a portion of that money into your savings account. This is a great way to make sure that you're building up your savings without even thinking about it.
One thing to keep in mind with this strategy is that you need to make sure you have enough money left over to cover your expenses. You don't want to end up in a situation where you can't pay your bills because you've already sent all of your money to savings. So, be sure to budget accordingly and leave yourself some wiggle room.
Strategy #7: Sell Some Extra Stuff
One of the quickest ways to get extra cash into your savings account is by selling some of your unwanted items. Take a look around your house—do you have any clothes that you never wear? Any furniture that you don't need? Any electronics that are just collecting dust?
If you have any items that you can part with, consider selling them online or at a garage sale. You'd be surprised how much money you can make by getting rid of some of your unwanted stuff. And that money can go straight into your emergency fund.
Selling your unwanted items is a great way to declutter your home and boost your savings at the same time. So, it's a win-win.
Strategy #8: Side Hustlin'
If you're looking for a more sustainable way to boost your savings, consider picking up a side hustle. A side hustle is simply any gig that you do outside of your regular job to earn extra money. This could be anything from dog walking to freelance writing to becoming an Uber driver.
There are endless opportunities when it comes to side hustling. And the best part is that you can often do it on your own time. So, if you're looking for a flexible way to make some extra cash, a side hustle might be the perfect solution.
Strategy #9: Make It A Game
Saving money just for the sake of saving seems boring. But what if you made it into a game?
There are a few different ways that you can do this. One option is to set up a savings challenge where you try to save as much money as possible in a certain period of time. Another option is to give yourself rewards for reaching specific savings milestones. For example, you could give yourself a $50 reward for every $1000 that you save.
Making saving into a game can help to make the process more fun and motivating. And who knows—you might even end up saving more money than you originally planned.
How much money should you save in your emergency fund
Many personal finance experts recommend that you should have an emergency fund equivalent to three to six months of your living expenses. The goal of an emergency fund is to help you cover unexpected costs in the event that you lose your job or face another financial setback.
While three to six months of living expenses may seem like a lot of money to save, it's important to remember that an emergency fund is not meant to be used for everyday expenses. Instead, it's there to help you through a difficult period until you can get back on your feet. If you're not sure how much money you should save in your emergency fund, a good rule of thumb is to start with enough to cover three months of living expenses and then build from there. By taking the time to develop a healthy savings cushion, you can give yourself peace of mind in the event of an unexpected financial emergency.
We have listed 9 awesome strategies above to get you started and create the right mindset. If you can't even set aside money to cover three months of expenses, no problem. Start with whatever you can and build your emergency fund at your own pace. Don't fall for the mistake of not building one because you can only save $50 per month. Every little bit counts and it will all add up eventually.
Where you should keep your emergency fund
Your emergency fund is your insurance policy against life's unexpected expenses. So where should you keep it?
The most important thing is to choose a safe place that is easily accessible in case you need to tap into it. One option is to keep your emergency fund in a savings account at a bank or credit union. This way, you'll earn interest on your money while still having easy access to it if you need it.
Another option is to invest your emergency fund in a short-term bond fund. This will provide you with some protection against inflation while still allowing you to access your money relatively quickly if you need it.
You can use services like PayPal with attached prepaid cards. This is a more independent solution from using banks. However, you can still use the PayPal account like a savings account and add or withdraw money as needed.
Cash is still king for many of us, so you can also choose to keep your emergency fund in cash. Just be sure to store it in a safe place, like a fireproof safe or home safe.
No matter where you choose to keep your emergency fund, the important thing is that you have one in place so that you can weather life's unexpected storms.
When and when not to use your emergency fund
Your emergency fund is there for a reason: to cover unexpected expenses when you don't have the cash on hand. But that doesn't mean you should dip into it for every little thing. So when is it appropriate to use your emergency fund, and when should you let it be?
Generally speaking, you should only use your emergency fund for, well, emergencies. That means things like job loss, major medical expenses, or natural disasters. If you can cover the cost another way, like with savings or income from a side hustle, then you shouldn't touch your emergency fund.
There are, of course, grey areas. If you need to make a large purchase that you can't afford with your current budget, but it's not strictly necessary, then you may want to consider using your emergency fund. Just be sure to replenish it as soon as possible so that you're prepared for actual emergencies down the road.
Don't be afraid to use your money if you need it. Remember the way you built your emergency fund and what you learned along the way. If you have built one before, you can replenish or even build one from scratch again. You have learned some invaluable savings and money management skills. Be proud of yourself and build an emergency fund again and again and again if you need to.
What are your thoughts on building an emergency fund? Do you have one in place? How do you feel knowing you are prepared for whatever life throws your way? Let us know in the comments below.
