An emergency fund is a financial safety net that helps you prepare for unexpected expenses, such as unexpected car repairs, medical bills, a job loss, or even a global pandemic. It’s something everyone should have, yet many people don’t. According to a 2020 survey, nearly half of all Americans have less than $500 saved for emergencies, and the COVID-19 crisis has exposed the financial vulnerability of many households.
If you don’t have an emergency fund, the time to start building one is now. In this guide, we’ll show you how to build an emergency fund and avoid financial stress during tough times.
1. Set a Savings Goal
The first step in building an emergency fund is to set a savings goal. How much money do you need to save for emergencies? A good rule of thumb is to save at least three to six months’ worth of necessary expenses, such as rent/mortgage, utilities, insurance, food, and transportation. If you have a high-income job or an irregular income, you may need to save more.
To calculate your savings goal, add up all your necessary monthly expenses and multiply the result by three or six. For example, if your monthly expenses are $3,000, you should aim to save $9,000 to $18,000 in your emergency fund.
2. Track Your Expenses
To save money effectively, you need to know where your money is going. Tracking your expenses can help you identify areas where you can cut back and save more. There are various ways to track your expenses, such as using a smartphone app, a spreadsheet, or a budgeting tool.
Start by categorizing your expenses into fixed (e.g., rent, car payment) and variable (e.g., groceries, entertainment) expenses. Then, look for ways to reduce your expenses, such as eating out less, buying generic brands, or canceling unnecessary subscriptions.
3. Make Saving a Priority
Once you know how much money you need to save and where you can cut back, it’s time to make saving a priority. One way to do this is to automate your savings. Set up a separate savings account for your emergency fund and schedule automatic transfers from your checking account to your savings account every month.
Another way to save more is to increase your income. Consider taking on a side hustle, selling unused items, or negotiating a higher salary at work.
4. Build Your Emergency Fund in Stages
Building an emergency fund takes time, especially if you’re starting from scratch. Don’t get discouraged if you can’t save your entire savings goal in one month. Instead, build your emergency fund in stages and celebrate each milestone along the way.
For example, you could aim to save $1,000 in your emergency fund within the first month, $5,000 within six months, and your full savings goal within a year or two. Breaking down your goal into smaller chunks can make it more manageable and less overwhelming.
5. Stay Focused
Building an emergency fund requires discipline and focus. It’s easy to get sidetracked by short-term temptations, such as a sale or a vacation. However, remember that the purpose of your emergency fund is to protect you from financial emergencies, so prioritize it over non-essential expenses.
You may need to make some sacrifices and adjustments along the way, but the peace of mind that comes with having an emergency fund is worth it.
6. Keep Your Emergency Fund Accessible
Finally, keep your emergency fund accessible and liquid. You never know when an emergency will strike, so you don’t want your money tied up in investments or locked in a long-term CD.
Consider a high-yield savings account or a money market account that offers competitive interest rates while keeping your money easily accessible. However, be mindful of fees and restrictions that may come with these accounts.
In conclusion, building an emergency fund is a crucial step towards financial stability and security. By setting a savings goal, tracking your expenses, making saving a priority, building your fund in stages, staying focused, and keeping your fund accessible, you can prepare for unexpected expenses and avoid financial stress during tough times. It may take time and effort, but the peace of mind that comes with having a safety net is priceless.
