One of the best things you can do for your personal economy is to start an emergency fund.
Your emergency fund can help protect you against financial setbacks, since it provides you with a little extra cushion to draw on. Rather than turning to debt, you can use money in your emergency fund to cover unexpected costs.
Experts recommend that you save at least six months’ worth of expenses in an emergency fund. So, if you spend $3,000 a month, you need to have $18,000 in an emergency fund.
Notice here that I’m talking about expenses and not income here. What you need to save in an emergency fund is money to cover what you normally spend in expenses each month, not how much you make.
Anyway, that’s a daunting task.
How can you get started when you have that huge amount of money hanging over your head?
Here’s How to Start an Emergency Fund
Break It Down
Realize that you don’t have to have that $18,000 in your account next week — or even next year. Look at your final emergency fund number as a goal you are working toward.
Big numbers and big decisions tend to paralyze us, making it difficult to start a course of action. Instead of always looking at your end result, focus on the small things you can do right now to start your emergency fund.
Look at your current spending plan/budget.
Figure out how much room you have to set aside money for a rainy day. This might mean you cut back and plug some money leaks. You might also look for ways to earn a little extra money. In any case, look for a manageable amount to put toward your emergency fund.
In some cases, breaking it down to something that sounds manageable is a good place to start. Don’t fret that you don’t have the money to set aside $500 a month. Instead, focus on the fact that you can find $20 a week to put toward your emergency fund goal. It may not seem like much, but the most important thing right now is to just get started.
Make Saving for an Emergency Fund Automatic
Once you know how much you can put into an emergency fund each week or each month, make it automatic. If you don’t have to think about it, it’s much more likely to be something that you do on a regular basis.
If you have a budget or spending plan, add your regular emergency fund contribution to the list. Codify it in your budget so that it is one of those non-negotiable expenses.
You need to change your attitude so that your emergency fund efforts are considered a vital part of your personal economy.
You can even take it one step further.
My emergency fund contribution comes out of my bank account on the same day each month. It’s automatically set up as an expense, and it’s clockwork. I don’t have to remember to make the contribution; it just happens.
Another good arrangement, if it’s available to you, is to have a portion of your paycheck automatically deposited into your emergency fund. Talk with your company’s human resources department to find out what you need to do in order to make it happen. If you don’t have the money in your paycheck, you’ll be less likely to spend it.
If you automate, make sure that the other adjustments to your finances are made; you don’t want to overdraw your account.
Where to Put Your Emergency Savings
We talked about how you should break down your goals into easy amounts and how you should automate those contributions. But where should you put these new emergency savings?
My preference is an online savings account.
I’ve had money saving up in an online savings account for years. What I like is the account tends to be out of sight for me so I’m not tempted to use the money. Sure I can access it if I wanted to but since it’s not my main account I don’t see the money all the time so it’s somewhat ‘forgotten’ and left to grow.
The main things to consider though is to put the money somewhere that is safe (you’ll have it when you want it) and where you won’t spend it. Having the money in your checking may sound logical but I find it’s too easy to spend the money if it’s mixed with your other funds.
Remember you need to have this money there for you when you need it — in an emergency.
A note about credit cards: You might wonder if your credit cards could be used as emergency savings. I say no and yes. No because too many people are already in credit card debt. If you carry a credit card balance then adding an emergency charge will not help your situation in the long run. You can do some big damage to your finances and your credit score. You’ll probably end up paying interest on the charges and you’re credit score will be hurt since you’re using more of your available credit.
On the other hand, if you have an emergency fund put away and you pay your credit card balances in full every month then using your credit card in an emergency is just a short-term bridge loan with no interest. You can use the card then pay it off in full with your emergency savings.
Boost Your Contributions
Starting your emergency fund is about doing something — anything — to get the ball rolling. Once you have started, though, you can check the situation to see if there’s something more you can do down the road.
As you get used to your smaller emergency fund contributions, you can look for ways to find even more money to contribute. If you currently put $80 a month in your emergency fund, look in your budget, consider a side hustle, and see if you can find another $20 a month to add to your monthly emergency fund contribution, bringing your total to $100.
As soon as you are used to that new level, change it up again.
It becomes a challenge to boost your contributions until your emergency fund is fully funded. If you turn it into a challenge or a game, you’ll increase your contributions faster, and reach your ultimate emergency fund goal that much sooner.
Re-evaluate Your Emergency Fund Needs
Make sure to take some time to every once in a while to look over what your emergency needs are. If your expenses or your income change then your emergency savings needs will change too.
For example, if you go from renting to buying a house then you want to make sure you have your new mortgage covered as well as the rest of your new expenses. Owning a house adds all sorts of things that can potentially break down where you’d need an emergency fund.
Consider also what your actual needs are. Should something happen, like losing your job, you will probably cut back on some of your expenses until you find employment again. You may not need as much as your current expenses are to get by. Remember, your emergency fund should be covering your expenses not your income.
Also consider the current economy and job market. The longer it would take for you to find a new job then the more you will need in emergency savings.
This may be difficult to judge. If you hear the economy or your job sector are doing poorly then you know you need to increase your savings. Be honest with yourself here. It’s too easy to assume you will be able to find a job easily.
Final Word on Starting an Emergency Fund
Once you start your emergency fund you’ll see it’s not that hard to keep it growing. The biggest part is to get moving and put that money away. You’ll thank yourself when that next emergency comes and you have the money socked away to cover it.
What are your best tips for starting an emergency fund?
Oh, if you’re looking for some places to track your finances so you can find space to start saving for an emergency fund take a look here:
Many years ago I didn’t really have an emergency fund. Then I talked to a coworker who had set up a CD ladder and I really liked the idea. At that time I had a bit of disposable income so I put $500/month into a CD every month. I now have 12 CD’s @ $2500/each. If I run into an emergency now I only need to break a CD or two. Then rebuild it over time. I’m overseas and I was able to do it all online (with Ally bank) which really made it easy. I couldn’t set up automatic deposits but I was able to tie my primary bank account to my Ally bank account and deduct what I needed to fund the CD’s.
Carmen Rane Hudson says
I’d love some tips on how to do this with variable income. I keep saving an emergency fund–and I keep having to use it on the lean months!
Excellent idea. There are many people who find themselves in that same situation. What can those of us that find ourselves dipping into our emergency fund do so as to not touch that fund?
John S @ Frugal Rules says
These are some great tips for those looking to start an E-Fund. For us, it was determining an amount that we wanted to hit at first, automate it and go from there. Once we hit that number we then just continued to increase it until we hit the amount we wanted.
Making it automatic was the biggest thing that helped us. I just put a set amount in there each month. It also helped that when we started our emergency fund it was during a time that you could get 4% from an online savings account. That help add a nice extra bonus each month.
My emergency fund is probably not a standard fund. I have some savings I can easily use, but most of my money is working for me. I can use my line of credit in a pinch which is my back up for savings. In addition, I have assets in a brokerage account I can use if really necessary. It has nver comme to that.
Two years ago, we started out with our emergency fund. I have a part-time writing gig where I get paid weekly. We opened a separate account and linked my payroll account to our emergency fund so that the earnings I receive from my part-tie gig automatically goes to our emergency fund. We were able to build our six-month emergency fund within a year. Continuing to do so, we now have an emergency fund good for a year. Does it mean we can go out of work for a year? NO. We do not plan to do it and hope we will not have to.
Greg Platon says
Financial advisers say that your emergency fund must be equivalent to your wages for at least three to four months. Such amount would be enough to cover mortgage, household bills, school expenses, your medical expenses if ever you get sick and the like…By the way, this is a great post. Thanks for the ideas.
We have an emergency fund and try to keep at least 6-12 months available. But we also have other things that are working in investments that we can use if needed. I haven’t looked at CD rates in awhile I may need too. Automation is the key for us, set it increase it and forget it.
Laura Bowman says
I opened a money market account with Redneck Bank. That’s the online arm of Bank of Wichita. The interest rate is currently 1.1%, and I have checks and a check card to use in an emergency. Funding it is easy – all by automatic deposits. And, it’s easy to keep money in there, because I would be embarrassed to use the check card anywhere and people look at the checks (and me) funny when they see the bank name. The balance limit for that interest rate is $35,000 – but that’s more than enough to build an emergency fund!
I’ve had trouble starting an emergency fund, one because I am still in high school and most of my money goes into my gas tank, and two because I am trying to save up for a professional saxophone for college. A saxophone is about $2,500 and I will probably make about that much this summer. Any tips on how to balance an emergency fund while possibly being able to get the sax I need for college?
Eugene Lim says
Great topic. The main question is how many months of monthly commitment? In my opinion, the healthy level of emergency fund should be min 6 months.
Simon Cave says
I believe that the hardest part of the process is to get the new habits of budgeting and/or making more money with a side job for example.
I recently had a neighbor go through an emergency situation and it was interesting to see them use their emergency fund. He lost his job shortly after moving in. They had a “just in case fund” but then had a car crash (when it rain it pours) and they ended up having to borrow from family. I found that you can plan for the minimum with your emergency plan, but if you want to be really secure you better plan for life happening as well. A little extra is better than a little less.
Glen Craig says
It does all come down at once, doesn’t it. The thing with emergency funds is you’re planning for the unexpected. Even if you don’t have everything you need for a particular emergency it’s better then nothing, like you said.
Rob, see if your bank or credit union will let you have more than one savings account. If so lable one as a Sax Fund and the other as your Emergency Fund. That way you can deposit money to both goals.
I have my stuff set up as my main savings, retirement savings, and I just recently set up a car savings. Good luck!
Amanda Griffin says
That’s a great tip about an online savings account that’s out of sight out of mind. It’s even better if it doesn’t have a local brick and mortar location that you can go and withdraw. Like withdrawing should be a 1-7 day process that deposits into your other account, so you know it’s a TRUE emergency and not just extra spending.
But if you still have super easy access to the savings account withdrawal, one of the biggest things to do to not dip into your emergency fund is to not tell anyone about it. I hear people bragging about their emergency funds all the time to impress other people. I think that’s an incredibly foolish thing to do in today’s society. But more importantly when other people figure out that you have ‘extra’ money, you will be the first person they turn to for a handout when they get in a tight spot.
These less financially responsible people will likely be someone close like a sibling, cousin, child, friend, etc…
Furthermore they might guilt trip you into giving it to them and I’ve seen relationships/friendships broken up over people feeling entitled to other people’s money.
I say all of this only because my dearest friend is going through this very thing. She has nice things because she budgets and saves, so she is considered ‘well off’. Well her sister needed $7000 for a gambling debt and she expected her to give her the money. When she turned her down, not only her sister but her whole family was angry at her that she didn’t ‘bail her out’. They are all angry that the 39 year old sister had to get the funds another way and tried to guilt her into believing that she was selfish and uncaring, when in reality, her emergency fund is for her 2 kids (one of them special needs). Never mind the countless loans she’s given her that were never repaid.
My point is that it’s hard for most people to say no to people they care about that are asking for financial assistance but unless you want other people to deplete your savings, you might want to keep it to yourself. Because when they know and you say yes, you become the go-to money tree who’ll be outcast if you ever say no.
P.S. Even if your family isn’t as dysfunctional, there’s bound to be someone who feels entitled to a loan from you because ‘you know you have it’.
Amanda Griffin says
I wanted to add that I have heard of adult children mooching off of their parents and then sticking them in nursing homes when they can’t afford to care for themselves.
Know what your fund is for and STICK to it. Know what situations fall under ’emergencies’ for this fund as well. For instance, keeping the household running after a job loss, unexpected medical emergency, security deposit if moving is necessary, minor-child related / grandchildren emergencies, etc…
If you want a ‘help other adults charity’ fund, start that one separately. Same as if you want a ‘splurge and spoil myself twice a year’ fund. I have one of these myself.
You can have as many savings accounts as you want. People don’t realize how easy it is to tuck $10-$40 month away. It’s as easy as the extra $20 you spend in the groceries because you saw a sale, or the $15 you spent at the burger joint because you didn’t feel like cooking. It all adds up, as does the savings.
Even if you don’t have the ‘luxury’ of affording a quick meal at a burger joint every now and then, I still think that even if you only put away 5% of your income (or even 5% of what’s left of your income after expenses), you’re doing better than 0%. It does make a difference, and if you get a tax refund back, you can do a percentage of that off the top before you start spending to bump it up.
Another thing is if you ever get a surprise check in the mail (overpayment refund, claim settlement, safe driving bonus, rebate check, neilson ratings, etc..) then you can automatically deposit that in your savings because you weren’t expecting it anyway or it’s so small you won’t miss spending it right away. You’ll be surprised at how much more of a difference it’ll make than if you blew it on the movies.
Here’s something nifty, if you’re really in a tight spot and want an additional stream of money, start picking up the coins you see laying around the house or car instead of vacuuming them up. Put them all in a big, clean, designated ‘chump change’ pickle jar (my kids called ours the ‘penny house’). Any loose change found in the laundry can go in there too. Check your couch cushions monthly for more contributions. Ladies don’t forget your old purses. Once or twice a year (or if it gets full first) deposit it into your savings.
Often times, we have more money than we think, we just have to value what we have— even the pennies.