Emergency funds are the basic building block of any sound economic plan. These nest eggs, usually in the form of a savings account or other easily accessible cash, cushion us from unexpected financial blows, keeping us from taking out loans, using credit cards, or getting behind on other bills.
Unplanned expenses never come at a good time, but when you have an emergency fund to help cover them, it’s easier to get your finances back on track. In this guide, we’ll share the top tips to help you start building yours today.
1. Decide Where to Keep Your Funds
The first rule of an emergency fund is that the money needs to be easily accessed without penalty. This eliminates typical retirement and asset protection plans like 401(k), CDs, or IRAs, as discussed in this article by OJM Group. Most people keep their cash reserves in a high-yield savings account where they can accrue some interest, but others keep their money in a safe.
In the event of an emergency, such as unexpected car repairs or significant medical bills, you can use this money, then work on replacing it once your income becomes steady again.
2. Determine a Target Goal
Funding your emergency account is different for everyone. The general rule of thumb is to keep adding to the fund until you can cover at least six months of expenses. The key is to have enough in your emergency savings account to prevent you from needing to take out a loan or dip into your other assets to cover an unexpected bill.
3. Do the Math
So, now that you know how much you want to have in emergency savings, how will you accomplish your goal? Some people assign arbitrary amounts to invest into their account every pay period, but if you do the math first, you’ll have a strategic method that will get you to your target faster.
First, take your goal and subtract any amount you have to put into the account when you begin it. In this example, we’ll start with $10,000, with an initial deposit of $2,000, leaving us with $8,000 left to fund.
Next, set a date to have your account fully funded and figure out how many pay periods that includes. Here, we’ll use one year, with a twice a month paycheck, giving us 24 pay periods. To fund $8,000 in 24 pay periods, divide $8,000 by 24, leaving $333 per paycheck. With that total in mind, you can add more to fund the account faster, or aim for ways to save that amount and invest it into your emergency fund instead.
4. Practice Saving Regularly
Setting aside the amount you need to reach your emergency fund goal might not be simple, but with a strategy for saving, it becomes doable. Here are a few ways to turn “saving” into a habit.
Paycheck Portioning
Choose a specific amount to deduct from your paycheck automatically. Some employers offer this option, putting a dollar amount or percent of your pay directly into a savings account at your request. If you don’t have this perk, make it a habit to place that amount into your emergency fund before spending any of your check.
Expense Saving
Where in your budget can you buffer some extra funds by cutting back on expenses? Consider chopping some of your streaming services or other subscriptions until you reach your emergency fund target, or holding off on the unnecessary items you wanted to splurge on. As a bonus, you might find that after living without those extras for a few months or so while you’re budgeting, you no longer want them!
Look into different insurance companies for your auto and other policies to see if you can find comparable coverages at a lower rate. Shop around for phone plans and any other service you’re not locked into a contract with a provider.
Finding ways to save money is a skill that will serve you long beyond your fully-funded emergency account. Living wise with your money can help you gain a better quality of life while stretching every dollar further.
Keep Track of Your Progress
Every win is exciting and gives you the momentum to continue your savings measures. Keep track of your progress, either digitally or manually, so you see your account grow with every paycheck.
Conclusion
Remember that this tightening of your budget isn’t permanent. How will you celebrate when you’ve reached your goal? When those extra funds aren’t allocated directly to your emergency account, you can take a month and do something fun to reward yourself (and your family) for your hard work.
Then, decide if you want to continue the strict spending and saving measures and keep building your financial portfolio in other investments. You’ve come so far; your thriving economic future awaits!
