How to Build an Emergency Fund
Let’s face it, life can throw us some pretty big curveballs. The unexpected happens whether we like it or not, so we need to plan accordingly. Surprise bills, unplanned medical expenses or home repairs are just a few examples that can throw our finances off track if we aren’t prepared.
When you don’t have emergency savings set aside, a common alternative is charging the cost of the emergency to a credit card or taking out a loan. Just a few emergencies can cause debt to snowball, making it even more difficult to save for the next one.
So, what can you do to prepare for surprises? Financial experts recommend setting aside some savings for an emergency fund – a stash of easily accessible cash to cover any unplanned expenses life throws your way. Here’s how:
How much emergency savings do I need?
Glad you asked. Experts recommend three to six months worth of living expenses. What if you suddenly lost your job or had to take off work for a medical emergency? Three to six months’ worth of expenses give you the cushion you need to pay your bills until you can get back on your feet. It may take some time to save that amount, but that’s okay. A good first goal when you are starting an emergency fund is $1,000. That’s a solid amount that can cover many types of unexpected expenses. The best thing to do is just start where you can.
Where do I keep my emergency fund?
It’s best to keep your emergency funds in a savings account, separate from your checking account. You want to have quick access to your funds, but you don’t want to be tempted to spend that money for anything other than emergencies. If the money is out of sight, then it’s likely out of mind.
How do I start my emergency fund?
Getting started is probably the hardest part. Begin with these three easy steps to get you started in the right direction:
- Set a goal. Even if it’s not a lot right now, that’s okay. The most important thing is to start. Decide what you can reasonable afford to set aside each paycheck, and increase the amount when you can.
- Pay yourself first. Get in the mindset of regular saving when you make saving from each check your number one priority. If the money goes directly into your savings account, you are less likely to spend it on other things.
- Automate your payments. Sign up for automatic deposits from your paycheck to savings. Payments go directly to savings, so you don’t have to remember to do it yourself. Or, set up monthly automatic transfers with online banking.
Start today to build your cushion, so you can have the peace of mind you deserve.