A financial emergency can happen anytime, a car breaks down, a medical procedure is needed, or suddenly you find yourself unemployed. These events can all be devastating to your finances and the monthly bills that need to be paid.
This is where having an emergency fund can be of high importance. By having reserved funds to cover these costs, you will not need to take on credit card debt or get a personal loan when you come upon a rainy day.
A simple and actionable step to getting out of debt is not going into debt in the first place. Having an emergency fund will allow you to navigate financial uncertainty that can be thrown your way.
When figuring out how to build an emergency fund, there is a simple process to follow, but keep in mind a few things before starting the journey.
- How Much Should My Emergency Fund Be?
- 8 Simple Saving Ideas
- What is a Finacial Emergency?
- Getting Started
How Much Should My Emergency Fund Be?
Every person has a different financial situation, but if you can build up a fully funded account that can pay for 3 to 6 months of expenses, this should afford you plenty of time to create a plan to combat the financial setback that you now find yourself in.
Ideally, you would have a few month’s worth of expenses set aside, but even $1000 is better than $0. This amount of money will at least help you with some of the absolute essentials while you work to get back on your feet.
Starting small is better than not starting at all.
8 Simple Savings Ideas
There are 8 simple steps that anyone can do to start an emergency fund today.
1. Set a Small Weekly or Monthly Goal
Create a budget and put away a small percentage of income each week or month into your savings account. This can be a simple and easy way to change your spending habits, setting the foundation of what is needed to reach the larger emergency fund goal.
2. Use a “Keep the Change” App
There are apps on your phone to help with savings. These are apps that tie into your bank account and daily spending. These apps will round up the change to the nearest dollar and put that money into a savings account for each purchase made. This will allow you to start building your emergency fund without even thinking about it.
3. Be Frugal
Having a tight budget is the fastest way to find extra money each month and start building your emergency fund. This can be as simple as skipping the line at your favorite coffee stand each morning, riding to work with a coworker, or cooking meals at home instead of going to happy hour after a long day.
4. Double-Check Subscriptions
In this day and age, there is a subscription for almost anything. Music, entertainment, health & wellness products, and everywhere in between, there are so many separate monthly services that they can add up without you even realizing.
Simply take inventory of what your monthly subscriptions look like and cut out what is not needed. This will allow you to save on unnecessary costs and become more efficient with the monthly services that you pay for. How many months can you go with one less streaming service?
5. Pay Yourself First
This idea is simple, instead of paying all of your bills first, simply put a set amount into your emergency fund before paying any bills or doing any spending. This will force you to save your money, pay your bills and cut out any unnecessary spending habits.
6. Get a Side Hustle
There are so many options to make a little extra money. This can include ride-share, grocery shopping services, or food delivery, to name a few. Many more opportunities can be done on your days off or in your spare time.
7. Plan Out your Tax Refund
The average tax return is $2,881, and this can be a major boost to an emergency fund—plan to deposit the full amount straight into your newly dedicated savings account.
8. Reevaluate and Adapt
Once you have been taking the above steps for a few months, look at how it has been going and make the necessary adjustments to reach your emergency fund goals.
What Constitutes a Financial Emergency?
The benefits of having a rainy day fund cannot be taken for granted. Setting a clear list of guidelines can prevent you from using the money for a non-emergency. Vacations, Christmas, home renovations, and expected bills are not emergencies.
Items that could be considered an emergency are:
- Medical emergencies
- Death with unexpected final expenses
- Surprise car repairs
- Sudden unemployment
- Emergency home repairs
- Disaster relief
a. Changing your mindset can help get you on the right track. Go from thinking “I want this” to “Do I need this?” which will cut out a lot of unnecessary spending.
b. Set a goal but start small and realistic. This will allow you to adjust your saving habits and build confidence in the process.
c. If you have to dip into your emergency fund, only do it on true emergency expenses. There is a major difference between coming up short for your monthly bills and an actual financial emergency.