Building your Emergency Fund
Having an emergency fund is important for many reasons. The main one is that life is unpredictable. No matter how much you plan, unexpected costs can always come up. Your car could break down and need an expensive repair, your fridge could stop working and need to be replaced, or you could end up having to travel to deal with a family emergency. There’s also a chance that you could lose your job or have to take time off if you’re sick or become injured.
If any of these situations (or thousands of other possible situations) happen to you, you could end up having to borrow money to make ends meet. This can result in serious debt problems that can take years to resolve and that can cause incredible stress and anxiety in addition to the long-term financial implications.
Having an emergency fund helps you deal with unexpected costs. However, many people feel stressed and anxious about building one. But it doesn’t have to be difficult or painful. Here are some ways that you can easily increase your emergency fund.
How Much Should I Have Saved for Emergencies?
Most experts recommend having at least three to six months of expenses saved for emergencies. However, the amount you should put aside depends on your situation. If you work freelance or do contract work, if you are the sole earner in your family, if you are responsible for supporting many people, or if you work in a field where it could be difficult to get a new job should you become unemployed, you may want to have more saved.
Unfortunately, many people do not have an emergency fund of a suitable size. A lot of people find it intimidating to save and thinking of saving several months of expenses can feel overwhelming. However, no one expects you to save this much all at once. Growing an emergency fund takes time.
Look for Small Savings
Start by looking at your budget and see where you can make cuts. If you can shave a few dollars from each category in your budget, for example, you can put this money towards your emergency fund. Small savings add up. For instance, you may be able to reduce your entertainment budget by $10 a month, your food budget by $10, and change your cable plan to save another $10 each month. None of these cuts will be especially “painful” to make, and the money can be used for emergencies instead.
If you start out thinking “I need to save six months of expenses,” that feels impossible and you’re likely to quit before you get started. However, if you decide to cut some smaller expenses and set a goal to put $100 into your emergency fund each month, for example, that might seem doable.
You’ll want to have a category in your budget for emergency savings and make sure you “pay” this expense every month, just like you would with any other bill. This will get you into the habit of saving and help your fund grow over time.
Use a Separate Account
It’s a good idea to store your emergency fund in a separate bank account – or even a completely separate financial institution – from your monthly spending money. This will prevent you from being tempted to dip into your savings to make ends meet. Your emergency fund should be for emergencies only.
Your employer may even be able to deposit a portion of your pay into this account, helping you build your fund without thinking about it. If that’s not possible, set up an automatic transfer.
As mentioned, you can set up an automatic transfer to move money from your main account to your emergency savings account on a set schedule. Most banks make this easy to do using their website.
Saving this way can be a good idea since it happens automatically, so you won’t forget. Plus, once you have the payments set up, you’re likely to not even notice the money moving after a while. Using this strategy, you can slowly build up your emergency fund over time without paying too much attention to what’s going on. It’s a low-stress way to grow your savings!
Stash Extra Money in your Emergency Fund
If you get a tax refund, work some overtime, get a bonus at work, or sell some of your belongings to declutter your home, put this money directly into your emergency fund. Since this is “extra” money that you didn’t include in your budget, you’ll still be able to afford your expenses and you’ll grow your emergency fund at the same time.