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 start an emergency fund in no time. No more sleepless nights for you!
We all know that life will throw curveballs at you at times.
Not everyone is prepared for them, over 40% of American wouldn’t be able to pay for a $400 unexpected costs. That is a car repair, health insurance bill, pay cut at your job, or house repair.
Fortunately, there is an easy way to pay for this kind of unexpected costs: you build up an emergency fund. That way you can pay for unexpected costs without going into more debt.
An emergency fund is a great start to get ahead of the majority of people and having the safety net your need!
No more sleepless nights, no more worries about your money, and no more stress surrounding money.
If you don’t have the cash at the moment, no worries. In this article, we’ll go into detail about 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 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.
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 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!
BUT in order to be prepared for anything, I still recommend you to 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 own 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 to not 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 really sick and you need to move in order 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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You Can Use Your Emergency Fund When
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, you can use your emergency fund.
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How To Build Your Emergency Fund
Building your emergency fund is an amazing goal, but it might be hard 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 dollars 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. Open An Account
It’s best if you 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 expenses that are not an emergency.
What I recommend is keeping it at a completely different bank than your other accounts, so it’s as far away as possible.
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3. 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%. You put the 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 transfer it automatically 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 off with good intentions. Once the good intentions wear off, it’s easy to spend your money on something else and get distracted.
By automating, you are setting yourself up for success.
[Realted Read; Trick Yourself Into Saving Money]
4. Lower Your Expenses
There are 2 two ways to make sure you are speeding up your process of building an emergency fund.
The first one is lowering your expenses.
If you have fewer expenses every month, you’re having less money than you should save for your emergency fund. Thus a shorter amount of time 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
5. 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 immideately 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
- Invest in your career (it’s worth millions)
Start Your Emergency Fund Today
How would you feel when you have no debt payments? AND you have six months worth of expenses saved for your emergency fund?
It would enable you to breathe easier, wouldn’t it?
Personally, I see an emergency fund like insurance.
It is costing you some money upfront, but when something goes wrong it covers you.
Do you have an emergency fund?