Emergency fund: why do you need it and how can you build it?
Thanks to an emergency fund, you’ll be prepared for any unexpected life situation. Read this article to get to know how to start such a fund and how much money to put there.
We can never know what might happen to us tomorrow. We might urgently need money because we’ve lost our jobs, our cars have broken down or we require costly medical services that our insurances fail to cover. To cope with such situations, you might want to have an emergency fund. From this article, you’ll get to know how to create it and make the most of it.
What Is an Emergency Fund?
Some people might call it “a rainy-day fund”. It’s money that you’ve set aside for life’s unexpected events.
You might wonder, what’s the difference between an emergency fund and a regular savings account? If you have the latter, you can use money from it for any purpose. For instance, you can buy a new car or pay for your child’s education. As for the emergency fund, you should never use the money from it for any other purposes, apart from something urgent and rather unusual.
How Much Should You Save for Your Emergency Fund?
If your emergency fund contains six months of your average expenses, it should be enough to make you feel comfortable. If this goal seems unrealistic to you now, you might start with saving at least three months of your average expenses. The more stable your income and household are, the less you need in your emergency fund.
You should strive to have a six-month fund if you meet one of the following criteria:
- Are a one-income family
- Are self-employed
- Earn straight commission
If you’ve had a steady job for several years or are a part of a two-income household, it should be easier for you to pay your bills in case of an emergency — so you might feel secure with a three-month fund.
Where Should You Keep Your Emergency Fund?
Your emergency fund should be liquid. You should keep your savings in a place where you can get to them easily and quickly. You can consider opening a simple savings account connected to your checking account. Alternatively, you might use a money market account that comes with a debit card or check-writing privileges.
Mind that you shouldn’t simply add the money that you regard as your emergency fund to your checking and savings account. You might want to use the services of different banks or even spread your emergency fund between several banks if it’s large enough.
A useful tip: online banks might pay higher interest rates. So you might want to choose the one that enables you to transfer money quickly and directly to your checking account.
How Can You Build an Emergency Fund?
To build a substantial emergency fund, you might want to rely on the following four rules.
Make a Budget and Live by It
If you’re not using a budget-planning tool yet, it’s time to get started. You can download one of the popular mobile apps that help you analyze and control your monthly expenses. It will show how much money you spend on each category of products or services. At a glance, you’ll understand how you can cut down your expenses and find money to transfer to your emergency fund.
Get Cash Back
Again, you can install an app that will help you to purchase products with maximum cashback. As soon as you receive this money, you should add it to your fund. Such an approach adds an element of gamification to the process of saving and you can have great fun while sticking to it.
Set a Monthly Savings Goal
You shouldn’t deprive yourself of things that you seriously need. You should set a realistic goal that you’ll be able to meet. If you get your salary once or twice per month, you should put aside some part of it as soon as you get the money. In a couple of months, you’ll feel proud that you have managed to accumulate a certain sum and it will be easier for you to go on.
Try to Put Aside More Money When You Have a Chance
You or your spouse might get a promotion at work, you might win a lottery or inherit some money. Don’t hesitate to add that extra income to your emergency fund. This will enable you to achieve your saving goal faster than planned.
How Can You Start an Emergency Fund Quickly?
People who would like to create emergency funds in the shortest possible time normally resort to the following measures.
- Try to boost their income. They start side businesses, take on part-time jobs and offer useful services to their neighbors.
- Adjust their tax withholdings. You might consider doing so if you get a big tax refund each year. Many people spend this money on impulsive shopping. But you might try to exercise your willpower and use this sum to start your emergency fund. Consider this tax refund as an interest-free loan that you’ve let the government hang on to for you all year.
- Sell stuff. What do you do with clothes, furniture and other objects that you don’t need anymore? Do you throw them away or give them to charity? What if you try to sell them? You can do it either on social networks or on sites that specialize in this type of sales. Even if each object costs no more than $10, you might end up earning hundreds of dollars in a few months.
Starting from scratch is always the most difficult part. If you manage to start an emergency fund quickly, that should motivate you to save money systematically.
Hopefully, this article came in handy and now you better understand the importance of having an emergency fund. This type of savings can help you in any unexpected life situation. Try to save a sum that equals six months of your expenses. To get started, you might want to sell your old stuff, adjust your tax withholdings and find sources of additional income. You might want to open a new bank account for your fund and install a budget-planning app.