Do you want to build your emergency fund ASAP but don’t know where to start? Look no further. Here you will learn how to create an emergency fund in no time. No more sleepless nights for you!
We all know that life will throw curveballs at you at times. Despite all your best efforts in budgeting, an unexpected rainy day can rear its ugly head now and then.
Not everyone is prepared for them. Over 40% of Americans wouldn’t be able to pay for a $400 unexpected cost. That is a car repair, health insurance bill, pay cut at your job, or house repair. Most people just live on paycheck-to-paycheck, which is a recipe for debts, penalties, and higher monthly expenses.
Fortunately, there is an easy way to pay for this kind of unexpected cost: you build up an emergency fund. That way, you can pay for unexpected expenses without going into more debt. Set money aside so that your personal capital will not be affected if an unforeseen event does happen to you.
An emergency fund is a great start to get ahead of most people and have the safety net for your needs!
No more sleepless nights, no more worries about your money, and no more stress surrounding money. With this, you will always know that you have extra cash you can use.
If you don’t have the cash at the moment, no worries. This article will detail how to create an emergency fund and when to use the money.
What Is An Emergency Fund Exactly?
An emergency fund is money you save for when unexpected costs come up or when you lose income.
Your emergency fund for when your car breaks down, you need to pay for an unexpected health insurance bill, and more.
Your emergency fund is not for a planned purchase like a new TV, college, and so on.
An average emergency fund should contain enough to cover three to six months of living expenses.
When emergency expenses come along, you don’t have to get into more debt. You have put aside money as emergency cash if any of these things do happen to you.
Having an emergency fund can give you the peace of mind that you need to deal with future unexpected expenses.
Your finances are taken care of, so that’s one less thing to worry about. Believe me; your future self will thank you!
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Why Do You Need An Emergency Fund?
Many people think that an emergency fund is great for others, but they don’t need one right now.
I hope that nothing will go wrong in your life! This is what everyone hopes for, but financial security includes money for unforeseen incidents that can happen in life.
But to be prepared for anything, I still recommend you start an emergency fund.
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There are a few major things that will make you grateful for the fact that you’ve started your emergency fund:
1. Unexpected Expenses
There will always be things happening in your life. That’s okay.
It is up to you: prepare for when things hit the proverbial fan.
Unexpected expenses are for emergencies like:
- Unexpected medical bills
- Car repairs
- Home repairs
- Economic downturns (unable to move, unable to sell your car, etc.)
- Vet bills
To be clear, what isn’t an emergency:
- A great deal on intercontinental flights
- Expected medical bills (these should be budgeted)
- Replacing your old furniture for new items
- Your car needs new tires next year (should be in the budget)
If you decide to start an emergency fund today, you will notice less impact of financial emergencies when they happen.
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2. Decreasing Income
When in 2008, my stepdad lost his job, my parents didn’t have an emergency fund.
They took $5,000 from my savings account, which is not a position I would want to be in personally.
Try not to rely on family or loans when a situation of decreasing income occurs.
Losing your job is not the only situation in which you can lose your income. What if someone in your family gets sick and you need to move to care for them? What if we hit the next downturn and you can choose: lose your job or take a 10% pay cut?
I hope you will never get into this situation, but it’s possible for sure that something like that will occur.
Instead of going into more debt, aim for three to six months of living expenses in an emergency fund.
I have six months of expenses in cash for emergencies. While I know it’s not very likely for me to have no income for six months, I would rather be safe than sorry.
This money gives me peace of mind, which is worth so much.
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When Can You Use Your Emergency Fund?
Before you go ahead and use your emergency fund, you have to ask yourself three questions:
- Is it unexpected?
- Is it an emergency?
- Do I need it?
Only when all three questions are answered with yes, can you use your emergency fund?
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How To Build Your Emergency Fund?
Building your emergency fund is a great goal, but it might be challenging depending on how much you can put aside each month.
If you spend $1,500 a month, but you can only put aside $100 per month, it will take you 7.5 years to save enough for six months of costs.
Just so you know: that’s okay!
If 40% of Americans cannot pay $400 in unexpected costs without going into debt, you are doing it a whole lot better than any of them if you are saving anything at all.
Yes, your emergency fund will take a long time to build.
However, there is a faster way. You cannot only save part of your income to build your emergency fund, but you can also lower your expenses or earn more money to get towards your goal sooner.
There are 5 steps towards building your emergency fund FAST:
1. How Much Money Do You Need?
The first step is to know how much money your emergency fund needs. You do this by adding up three to six months of expenses, like:
- Car payments
- Utilities (water, electricity, etc.)
If you spend $1,000 per month, your emergency fund should be $3,000-$6,000
When you spend $3,000 per month, your emergency fund should be $9,000-$18,000
If you spend $5,000 per month, your emergency fund should be $15,000-$30,000
The average American spends $60,060 per year, which comes down to $5,005 per month. That means you should save between $15,000-$30,000.
If you want a tailored approach to your platform, you can also use an emergency fund calculator.
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2. Create A Budget And Follow It
Creating a budget that works for you helps you track your expenses and spend only on the essential things. In addition, you will be able to see how much money you can save. Following a budget doesn’t mean that you are deprived of the things that make you happy, but it will help you achieve your financial goals.
Being frugal does not mean being cheap. Rather, manage your life so that you have ways for saving money and you can build money in savings regularly. Minimize spending habits to avoid extra expenses.
Stick to this kind of financial life and set aside extra money that should be saved for a rainy day fund. This will make your life a lot easier for sure.
3. Open An Account
It’s best to keep your emergency fund in an account that you can access easily and quickly. But, make sure you don’t keep it in a place that’s too easy to access. You don’t want to dip into it for an expense that is not for emergency.
I recommend keeping it at a completely different bank than your other accounts, so it’s as far away as possible.
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4. Automate The Heck Out Of It
Automating your finances is my #1 tip if you don’t want to know how much you can spend each month. You choose a day and have your income directly transferred to your checking account.
When you receive your salary, X% goes directly to your emergency fund. I would recommend 5-10%. Putting money towards your goal, and you automate it. That way, you don’t have to look at it before you’ve reached your goal.
Now it’s easy for me to save money, and I take $888 from my checking account every month and is an automatic deductible to my savings account.
I started two years ago with $50 every month. It’s good to be working towards something, even though it’s slow.
When you are automating, you are protecting yourself. You will start with good intentions. Once the good intentions wear off, it’s easy to spend an amount of money on something else and get tempted.
By automating, you are setting yourself up for success.
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5. Lower Your Expenses
There are 2 two ways to make sure you are speeding up your building an emergency fund.
The first one is lowering your expenses. Spend Less. Save more. Save funds. Repeat. Say it with me. Expense should not be your first line item when you have a budget. Saving habits should be your priority and mentality.
If you have fewer expenses every month, you have more money than you can save for your emergency fund. Thus a shorter amount of time is needed to build up your emergency fund.
Some ideas to instantly lower your expenses:
- Dive into minimalism, so you need fewer things
- How I cut my electric bill in half – and you can too
- Have a clothing ban, so you don’t buy any clothes for the year
- 25+ Savings Tips
- Temporarily cut back on luxury expenses
6. Make More Money
The other way of speeding up the process of building an emergency fund is making more money. It’s going to take time, but there are many ways.
Some ideas to immediately make more money:
- Sell things around your house you no longer use
- Declutter your life and sell what you don’t use
- Start your own business
- Get a promotion to a higher position with more salary
- Work overtime
- Ask for a raise at your current job
- To invest in your career (it’s worth millions)
How To Keep Your Emergency Fund Safe
Now that you know how to build your emergency fund, it is important to secure your emergency fund. Remember that this is your hard-earned money. Your financial freedom is dependent on the money set aside for your monthly needs, future needs, and unexpected needs.
Here are some essential pointers that you need to consider in placing your emergency fund:
Security and Protection Of Your Fund
It is very important to park your emergency funds in a secure channel because you need them through rough times. Make sure that your emergency savings are in a trusted and safe financial institution.
Accessibility Of Your Fund
As mentioned above, emergency money is needed during unexpected expenses, so it is very important that you withdraw cash without any difficulty. Make sure your bank account has a way to visit and use it in times of need easily.
Separate Investments From Emergency Funds
A wise financial plan would say that you should never put your emergency funds into your investment plans when budgeting money. This is because your investment may not actually earn right away, and when you do need to use your emergency funds, you will have a hard time doing so since your money is tied up to your investment.
The rule of thumb is that you should differentiate money to be used for your investment and the amount saved for your emergency needs. Manage your money so that these two are not tied up between them that will cause more problems for you.
To Sum Up – How To Start An Emergency Fund
How would you feel when you are out of debt? AND you have six months worth of expenses saved for your emergency fund?
It would enable you to breathe easier, wouldn’t it? You have enough for your financial wellness and financial future altogether. Any hardship that you could have had was averted because of your savings.
Personally, I see an emergency fund as insurance. You are protected and covered in the short term and in the long term goals. It costs you some money upfront, but when something goes wrong, it covers you.
So save up more and add up to your savings fund to be financially sound and secure. Make a monthly budget that considers all these important factors and if you already have one, enhance it further so keep saving for a rainy day and for any financial emergency that comes your way. This is the best savings strategy as part of your retirement plan for your future. Start saving now and save for a rainy day also!
Do you have an emergency fund?