Ever been in a pinch and needed some cash? Maybe you have an unexpected medical bill, or got into a car accident and need to pay to get your car fixed. Whether it is a big or small incident, having an emergency fund in these situations can be helpful. Here we will detail what an emergency fund is as well as all the tips to build an emergency fund.
Emergency Fund Basics
Before we can discuss the tips to build an emergency fund, let us dive into what exactly an emergency fund is. An emergency fund is just a bank account where you set money aside in. These funds should only be used in the case of an emergency. Your emergency fund should be used to large and unexpected expenses. Note, your emergency fund should be separate from your regular savings account.
Some of these expenses include:
- Medical expense
- Home repair (i.e. roof, septic system, etc.)
- Major car fixes
- Possible unemployment
- Paying off debt to improve your credit score
You may be wondering how much needs to be in your emergency fund. Well, this depends on the person. A good rule of thumb is to have around 6 months worth of living expenses saved up. This should be more than enough to cover any large expenses, or support you incase you lose your job.
If you are just starting off, don’t be discouraged. You have to start small and as long as you put a little money away each paycheck, you will eventually have enough.
A regular savings or checking account at your bank is a great place to keep your emergency fund. In today’s banking environment, interest rates on these types of accounts are very low. This is fine unless you have a large balance. If you have several thousand dollars or more, you may want to think about putting your funds in low risk investments. These investments include a time deposit like a certificate of deposit (CD), or in mutual funds or exchange traded funds. If you do decide to invest your emergency fund, be aware that it may lose value. Historically, investments do have a higher return than other types of accounts like a checking or savings account.
Tips to Build an Emergency Fund
Now that we covered the basics, here are some tips for you when you build an emergency fund.
If you are just starting off, you need to just start somewhere. Instead of setting large goals, start off by setting smaller, realistic goals. $500 is a great goal at the beginning, and this figure can be reached quickly. You won’t get anywhere if you work towards unrealistic goals. Instead, smaller steps will help you stay motivated and focused on your desired amount, as you will be able to reach and increase them faster.
Automate Your Savings
Instead of manually transferring money every time you are paid, automate your savings. This will help you build an emergency fund without even thinking about it. Financial apps on your phone or websites can help you do this. You can even set up a direct deposit every paycheck that takes funds and puts it in your emergency fund.
You just need to set up an automatic contribution to your savings account each time your paycheck gets deposited into your bank account.
This doesn’t have to be a large amount, just get in the habit of putting funds away into your savings automatically. Trust us, you won’t even notice that the money has gone missing while saving towards your goal.
Create a Budget
Part of creating a budget is tracking your expenses. One great way to build an emergency fund is to track where your money is going. While this might be time consuming at first, once you have your process in place it will be second nature. Once you get your budget in place, you can adjust the amount of money you are putting in your emergency fund.
Never Give Up
The last tip that will help you build an emergency fund is to never give up. Even if it takes you months or years to reach your eventual emergency fund goal, stay positive..
he most important thing is to remain focused. By saving money regularly and tracking your expenses, you will eventually be able to build an emergency fund.
All that is left for you to do is to stay motivated and disciplined. Remember that every amount matters – you will be thanking yourself in the future.
Tips to Build and Emergency Fund – Summary
Having to pay unexpected expenses is something that happens to all of us. That being said, you can take steps to prepare for these events. The best way to do this is by setting up an emergency fund.