How to Start Saving For Your Emergency Fund
Build Your Emergency Fund Step-by-Step
1. Pay yourself first - Treat the monthly savings like a bill.
2. Start saving 5% of each paycheck.
3. Schedule an automatic transfer from your checking to your rainy-day account.
4. Cut some costs on your monthly expenses.
5. Forget about it and watch it grow.
Why Do You Need an Emergency Fund?
An emergency fund is a readily available stash of money that protects you during tough times, in case of loss of income, or unexpected emergency expenses.
We all need an emergency fund, a cushion of cash to protect us during financial rainy-days. Without a rainy day fund, you are one job loss or car repair away from disaster.
I’m pretty sure you already know that you should have a rainy day fund to keep you afloat when times are tough.
But do you believe that you can do it?
Saving for emergencies is possible. It may not be immediate, but if you make a plan and stick to it you can do it!
Financial stability can be threatened by many causes, and the family that depends on it can find itself upside down financially in few weeks.
Once you have saved enough, you can feel secure that your family is covered in case a paycheck disappears, or other dreadful episodes happen.
What Is the Emergency Fund's Ideal Amount?
How much savings is enough to have in an emergency fund?
The rule of thumb for the amount you should keep in your emergency savings is three times your monthly expenses.
To calculate it add up you essential expenses for the month, including rent/mortgage, food, car payments, childcare, groceries, utilities, etc.
Take the total and multiply it times three. The resulting amount is your goal.
If you typically spend $3,500 a month, your goal will be $10,500.
If you feel like the resulting sum is enormous, don’t worry, all you need to do is start small. Even the ocean is made of drops.
What is a Real Financial Emergency?
To understand what can be considered a real emergency, you have to consider the consequences if you don’t take care of it.
A real emergency threatens your survival, your ability to work, or your health, not just your desire to be comfortable.
It’s a real emergency if your family is about to go hungry or be thrown into the street.
Remember the rule: if it’s not an emergency, you cannot use the rainy-day fund. No exceptions allowed.
Examples of Non-Emergencies
- You get invited to a wedding and need a new dress.
- You need a new refrigerator because the one you have does not make ice.
- You found an amazing living room set for a once-in-a-lifetime price.
- Something you desperately want goes on sale.
Where Do I Find The Extra Money to Save?
The first thing you have to do to be able to build an emergency fund is to truly understand you need it.
Visualize how much peace of mind having some savings can get you. Imagine how much you would regret spending the money for unnecessary things when your family suffers for lack of money.
There are two ways to start saving more:
- Spend less.
- Make more money.
Pay Yourself First
One way to make sure you get to the end of the month with some money left is to treat saving like a bill, make it part of your budget.
Every month, pay yourself first, transferring from your checking account to your rainy-day account. It helps to schedule this transfer in automatic, you can schedule automatic transfers on your payday from your checking to your money market account.
Save 5% of your paycheck every month, until you reach your goal.
At the end of the month, if you have any other money left transfer it to your rainy day account too.
You can do it. Focus on your goals and find the strength and motivation to change your spending habits.
You May Have to Give Up Something For a While
If, like most people, you leave paycheck to paycheck, it might seem impossible to even get started to save the first drop of the ocean. You may think: I will never make it to having 3 times my monthly expenses saved, why even try?
It does not have to happen right away. Hopefully, you won’t have a big emergency any time soon, so you have time to get ready for one in case it comes. And if it happens too soon, well at least you’ll have something set aside to help you afford it.
To get started, temporarily give up something important but not essential. For a period of time sacrifice some luxuries that you got used to, like premium cable or dining out. It will help to know that it’s only temporary. Then look for ways to cut corners on everyday expenses.
Keep the money you save in a separate account, where you don’t allow yourself to dip for any monthly expenses or non-emergency purchases.
Where Do I Keep My Emergency Fund?
With interest rates as low as they currently are, you don’t need to focus on the return rate, but make sure your money is safe and accessible. A money market account in a sound credit institution will work.
If you already have a money market account where you stash money for vacations, gifts, etc., those are not emergencies: you need to open a new account for your emergency fund only, or revise the purpose of that money.
Focus on accumulating your piece of mind amount first, and then you can indulge in vacations and other extra expenses.
Can I Invest My Emergency Fund?
Your emergency fund needs to be readily available, so you should not have it invested in ways that would cost you a penalty if you withdraw the money suddenly to take care of an emergency. Keep it in a money market account, where it will grow some interest.
If you are able to save more than three times your monthly expenses, great. Do it! In this case, you don’t need to keep the whole amount readily cashable; you can invest the surplus in longer-term investments with a higher return than the average money market account.
How much you need to save to be able to sleep well at night is quite personal. The minimum recommended is three times your monthly expenses, but some people would still worry, even with that amount.
It’s really up to you how far you deem necessary to grow your emergency fund before you can use the money for unnecessary purchases.