It is possible for emergencies to come out of nowhere. When faced with an emergency, it is important to be prepared so that you can respond quickly and effectively. A healthy emergency fund can make a huge difference in the world. Having an emergency fund in place can help to ease the burden of unexpected financial issues, giving you peace of mind that you have a backup plan should something go wrong. Setting aside enough money to cover three to six months of expenses is fairly easy. Whether your savings account balance is $0 or you already have a head start on saving, here is a quick guide showing you how to start an emergency fund. An emergency fund is a must-have for any budget.
7 Steps to Start an Emergency Fund
1. Set a Budget
Determine your cash flow and monthly expenses by doing some basic budgeting. You can allocate your funds once you have an understanding of your cash flow. A budget can serve as a financial roadmap, helping you determine how much money you can safely allocate for various accounts.
Suppose you have an average monthly income of $3,000. You can use the extra money to save for a rainy day, or invest in something that will bring you a bigger return in the long run. $1,200 can be spent on rent, $600 on food, $150 on utilities, and $100 on debt payments. $350 can be used for other expenses. You have $900 left to spend, save, and invest. You can use the money to make investments that will give you passive income over time. To seed your emergency fund, you can use some of that cash. Ideally, you should be setting aside money each month to build up your emergency fund so that you have a cushion when unforeseen expenses arise.
It is easy to form a budget. Staying on track is the key to success once you have a budget. If you need help, consider using a service like You Need a Budget (YNAB).
2. Open an Emergency Account
Once you have a basic idea of your budget, the next step is to set up a separate bank account dedicated entirely to emergency savings.
Here are some of the best places to park your emergency fund:
- Checking accounts have low interest rates. They are an ideal choice for people who want to store their money in a safe place without sacrificing potential returns. However, the best checking accounts give you the flexibility to move money around as needed without transaction limits.
- Money market account offers the flexibility of a checking or savings account with a higher interest rate. Your money is safe because it is insured by the FDIC. A limited number of checks can be written against your money market account. overdraft fees can be expensive if you exceed the limit, so be sure to stay up-to-date with your account balance.
- High-yield savings account: A high-yield savings account (HYSA) is an online savings account with interest rates that run roughly 20 times more than traditional checking or savings accounts, making them an ideal vehicle for an emergency fund.
Cash bonuses are offered by some banks when you open a new account. The bonus is worth your time and effort if you read the fine print. A bank bonus could help jumpstart your savings.
3. Establish Your Emergency Fund Goal
Your next step is to figure out how much money you have. The calculator below will show you how much is right for you. If you know how much money you should have in an emergency fund, you can start taking steps to reach that goal.
If you lost your job, you might be unemployed for 6 months.
To cover this, you will need about: $30,000
Which means you still need to save: $30,000
4. Start Small
It will take time to build your emergency fund. Establishing a budget can help you save money. It is good to know how much you need to save, but give yourself small savings goals to start with. Start with a goal of saving a certain percentage of your income each month, and work your way up from there.
You will be motivated to create bigger goals when you meet these goals. Creating a savings goal can help you stay motivated and make saving money more manageable.
No matter what, you should always contribute to your emergency fund. As you get more financial security, make sure to increase your contributions. Pick a frequency for your contributions and set aside a certain amount of money. You will be surprised at how quickly you can reach your financial goals with regular contributions. It will take a while for your new financial habit to stick. It will become easier to maintain your new financial habit if you practice it more.
To fast-track your emergency savings goal, put extra money from a birthday gift or a tax refund towards your fund. If you want to reach your goal faster, you can set up a direct deposit from each paycheck.
5. Put Your Savings on Auto-Pilot
Automating your savings will help you build up your emergency fund. With automated savings, you don’t have to worry about manually transferring money each month – it’s taken care of for you!
You can put part of your paycheck into your savings account. This will help you build up your savings by setting aside money each month. You may be able to do this with a direct deposit from your employer. You can increase your savings by taking advantage of employer match programs.
There is a round-up feature in some bank accounts, where purchases are rounded up to the next dollar and spare change goes into savings. The feature is a great way to save money.
6. Keep It Balanced
You need to balance your savings goals with your debt repayment strategy if you want to prioritize your emergency fund. Slowly increase your contributions as your financial situation improves, by putting away what you can each month.
If you have toxic high-interest debt from loans or credit cards, you should take a level approach to your savings and consider the cost of interest charges. Paying down any debts should be your priority as it can help you save money in the long run.
It might look like you set a smaller savings goal as you work to pay down your debt, then increase your emergency fund contributions as you go. Once you have a comfortable amount saved, you can gradually build up your savings.
7. Invest for Growth
If you contribute too much to your emergency fund, you will lose sight of your long-term financial goals. The right balance needs to be struck between short-term security and long-term growth. Once you’ve reached your emergency fund goal, start investing for long-term growth, too.
Young investors should put money into long-term retirement accounts like individual retirement accounts (IRAs), Roth IRAs, and 401ks. You may also want to explore using a Health Savings Account (HSA) if you’re eligible.
These savings accounts give you more when you retire because they collect compound interest over time. You can reach your retirement goals faster with the help of compounding interest. You can invest your money in the stock market.
Why You Need an Emergency Fund
Here are a few reasons why having an emergency fund is important:
- An emergency fund can be used to cover basic expenses, such as food, shelter, utilities, and fuel. If there is a financial crisis, it is important to have enough saved up in an emergency fund. It can be used to pay medical bills. Financial security can be provided for unexpected expenses such as a job loss or a natural disaster.
- You can avoid financial setbacks if you have an emergency fund. It can also keep you from racking up credit card debt unnecessarily.
- Lengthy hospital stays, ambulance rides, and medication can cost tens of thousands of dollars. Setting up a payment plan with your hospital or doctor is one way to make sure that you are able to keep up with payments. Estimates show that between a quarter and a half of all bankruptcies involve medical expenses. In the United States, medical costs are a factor in over half of bankruptcies. It is possible to set aside money ahead of time.
How Much to Save in Your Emergency Fund
You should have enough money in your emergency savings fund to cover three to six months of living expenses. It’s important to start building an emergency savings fund as soon as possible to be prepared for unforeseen expenses.
Your savings goals should be based on your income, expenses, and debt. It is important that your savings goals are realistic and doable.
Saving enough to cover your rent, mortgage, loan payments, food, gas, and utilities is more important than replacing your paycheck. Setting aside money for fun and leisure activities will help you achieve financial independence.
It takes time to build up an emergency fund. Take time to build up your savings goals. Set realistic goals that you know you can achieve and celebrate successes along the way.
Where to Put Your Emergency Funds
One of the best places to put your emergency savings is a high-yield savings account from an FDIC-insured bank. Having an emergency fund to draw from in times of need can provide great peace of mind, so it’s important to make sure you have a plan for where to store your funds. These accounts give you peace of mind. They can give you the chance to save more money in the long run.
It’s a good idea to open a savings account with an online bank. If you open a savings account with an online bank, you can get access to higher interest rates and other features. These banks charge less account fees and have better mobile banking features than traditional banks, but they don’t have brick-and-mortar locations.
Frequently Asked Questions
What is an emergency fund?
A rainy day fund is an emergency fund that you put away for unforeseen expenses. It’s important to have an emergency fund to be prepared for unforeseen financial situations. An emergency fund can be used to cover car repairs after an accident or to cover living expenses after a job loss or illness. Emergency funds can be used to pay for unexpected medical bills or home repairs.
One of the smartest financial decisions you can make is to put together an emergency fund. Having an emergency fund can give you peace of mind.
When should you use emergency savings?
Emergency savings can be used for unexpected bills, such as a broken down car, job loss, home repair, or medical emergency. Before using credit cards or touching your investments, turn to your emergency savings. Before you use your emergency savings, you should exhaust all other options.
Emergency savings should not be used for routine monthly costs. In case of a financial emergency, it’s important to build up your emergency savings so you don’t have to worry about covering the expense.
Learn more:
Should you use retirement savings for emergencies?
It’s not a good idea to use retirement savings from a 401(k) account. Retirement savings should be left untouched until you reach your retirement age. You will have to pay taxes on the money you withdraw early if it comes with a stiff financial penalty. It’s important to consider all the consequences before withdrawing funds from your retirement plan.
The best way to treat that money is to focus on other ways to plan for emergencies. Setting aside money for unforeseen expenses is a great way to prepare for the future. Diversify your income to bring in more cash to set aside, and put money into high-performing savings accounts and the stock market.
Should you put emergency savings in the stock market?
Since the stock market is volatile, you shouldn’t put your emergency fund in a stock market account. If you know your money will be safe, you should keep your emergency fund in a secure savings account. Don’t invest money that you can’t afford to lose. It is important to only invest money that you can afford to lose. Make sure you have enough money in your savings to cover emergencies when you put money into the stock market.
You can invest your emergency fund if you’re strategic about it, but it’s important to understand the risks.
How can you prevent tapping into emergency savings?
If you lose your income, Diversify it to avoid tapping into emergency savings. If one source fails, you can rely on the others. One way to do this is to start a side hustle or a side gig. It can help reduce the risk of losing your job if you expand your sources of income.
The Bottom Line
Life is unpredictable. You may find yourself in a situation where you can’t bring in money because of something. You are not alone in this situation and there are resources available to help you get through it. You might be faced with an unforeseen expense that you didn’t budget for. It’s important to plan ahead and anticipate potential costs because these expenses can take a toll on your financial situation.
If you start an emergency fund and link it to your bank account, you will have a safety net to help cover short-term expenses during an emergency situation. Having an emergency fund in place is one of the best ways to prepare for any unforeseen situation that may arise.
Financial security is all about planning. If your financial foundation is secure, you can be prepared for any unforeseen expenses. You will be better off down the line if you start an emergency fund. You will have peace of mind knowing that you have a financial cushion to fall back on, because you will be prepared for unexpected costs. And once your fund is squared away, you can start thinking about other ways to invest your money and achieve financial independence.
