Life can be unpredictable. One day, you're humming along and everything is going as planned. The next day, your sewer line backs up or your car blows a tire. For many of us, unplanned misfortunes can cause some serious financial headaches. According to a report by the Federal Reserve Board, nearly 40% of Americans can’t cover a $400 emergency expense.
That's why building an emergency fund is so important. An emergency fund can shelter you from life’s unpredictable events and help you to avoid further debt.
We get it. Saving money for emergencies doesn't sound fun, and it can even be a bit intimidating. But it is one of the smartest things you can do to get ahead financially — and it's really not that tough if you follow these steps.
1) Set a Goal
Have you ever noticed that you achieve better results when you set a goal? Setting goals can improve your focus and help you gain momentum. So before you start building an emergency fund, you need to decide how much to save.
The ideal size for your emergency fund depends on a number of factors, including your:
- Average monthly expenses
- Income sources
- Family size
- Amount of debt
Most financial experts recommend setting aside between three and six months' worth of living expenses. If you work in an industry or live in a location where finding a new job may take a while, then its best to save closer to six months of expenses. Other the other hand, if you are less concerned with replacing your income and have less dependents, then three months' worth of expenses is probably enough.
Either way, decide on your target savings amount and a date to accomplish your goal. Write it down on a piece of paper, and post that piece of paper in a prominent location. Seeing it every day will remind you of your goal.
2) Review Your Budget
Now it’s time to review your budget. If you haven’t setup a budget before, you can easily get started with our free Money Management tools within online banking. Take a look at your monthly income, and compare it to your monthly expenses. How much income do you have left each month after paying all of your bills? What about after "optional" expenses like eating out? Whether you have $50 leftover or $1,000, the goal is to identify a savings amount that you can comfortably set aside to your emergency fund each month. Consistency is key!
3) Set up a Direct Transfer
Now that you know how much “extra” you can send to your emergency fund each money, its time to open a separate savings account for that money. That way, you won't be tempted to spend it on non-emergency items.
A Money Market account is a great option here because it keeps your money within reach while rewarding you with higher yields that help you to meet your savings goal faster. You can open a money market account online in less than 5 minutes.
Once you have your new emergency savings account setup, arrange to have an automatic transfer move the extra money from your checking account on a monthly basis. That way, you won’t be tempted to spend it.
4) Optimize Your Savings
By now, you may have realized that it can take quite a while to meet your emergency fund goals. Maybe you're transferring $200 a month into your emergency savings account, but your goal is to save $10,000. Reaching your goal at this rate of saving will take approximately four years. However, don’t be discouraged – there are ways to speed up the process.
The first place to look is your budget. Are there any spending categories where you can reasonably cut back? This is different for everyone, so you may have to do some soul-searching. Maybe you spend $400 a month on eating out. If you set yourself a budget of $200 a month, you’d free up an extra $200 a month to put into your emergency fund. Or maybe you’re spend $100 a month on a cable subscription that you could replace in favor of a streaming service.
Another option is to save a fraction of a dollar every time you make a purchase. Enrolling in a service like Debit Card Round-Up will round up your debit card purchases to the nearest dollar amount and transfer the difference to your primary share account once every day. While the increments may be small, over time this can add up to big results for your emergency fund.
5) Increase Your Earnings
A final step to accelerate your savings goal is to earn extra money that you can funnel straight into your emergency fund. While this is not feasible for everyone, for those who can earn extra money, the results can be quite large. There are a few ways to do this:
- Pick up a part-time job one or two nights per week.
- Sign up for ride-sharing and drive for an hour or two each day before or after work.
- Advertise a service like lawn mowing or house cleaning.
- Look for freelance gigs in your field of expertise.
Any extra money you earn should go directly into your emergency fund.
If you can trim $300 from your budget and earn an extra $300 a month, you'd have a $10,000 emergency fund saved in under a year and a half. Doesn’t that sound worth it? It all comes down to following the steps above. With an emergency fund in place, you won't have to worry any longer about unplanned misfortunes like your car breaking down or your sink clogging up. These are no longer emergencies. They're expenses you can afford.