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An emergency fund is money you set aside in a savings account to cover unexpected expenses – things like car repairs or a visit to the emergency room.
If you’re a living, breathing human being, you need an emergency fund.
Things out of your control will happen. It’s only a matter of time.
The Importance of an Emergency Fund
Imagine you’re sailing along, living paycheck to paycheck. You’re able to pay the bills. You splurge some on the weekends, not really thinking much about saving money.
Then one day it happens.
Your car stalls in the middle of the freeway. You pull to the side of the road and call a tow truck. Maybe you have enough money in your bank account to cover the tow. Maybe you don’t, and you put it on a credit card.
You certainly don’t have enough to cover a costly repair. What do you do?
If you’ve saved an emergency fund, you know the answer to that question. If you haven’t, you’re in big trouble (or deeper in debt).
I’m sure you can imagine any number of similar scenarios. Your kid breaks his arm and needs an expensive trip to the emergency room. Or maybe your hot water heater dies in the middle of winter.
Don’t let yourself get stuck without a safety net. Start saving now.
Step One: Open a Savings Account
Put your emergency fund in a savings account that’s linked to your checking account so you can get the money quickly when you need it. Use the same bank you use for checking, or an online bank such as Capital One 360 Savings.
Most importantly, make sure the bank you use offers online banking.
Step Two: Set Up Automatic Transfers
If you’ve created a budget, you know exactly how much extra money you have every month to put towards savings. If you haven’t created a budget, do it now! It’s a prerequisite for saving an emergency fund.
The easiest way to save is to automate the process. Log in to your savings account and set up automatic transfers from your checking account. The process for this will be different for every bank, but it shouldn’t be difficult to figure out.
If you have $500 a month for savings, create a transfer for $250 every two weeks. If you’re paid monthly, set it for once a month. The frequency doesn’t matter. Just get your money into the account every month.
Step Three: Save a Small Starter Fund
Start by saving a small starter fund of $1,000 – $2,000. This will cover you in case of any immediate disasters. Save at least enough to buy a cheap used car or cover your health insurance deductible.
You can do this no matter what your income level. You’ll save over $1,000 a year by putting just $20 a week in your savings account.
Put everything you can into your fund until you reach your goal.
Step Four: Pay Off Debt
Before you move on to saving a full emergency fund, pay off any outstanding debt. The starter fund should be enough to protect you through this step.
NOTE: This step is optional, but recommended. You can always save your full emergency fund first and then pay off your debt if you feel safer this way. Just keep in mind that delaying debt payoff means you’ll pay more money in interest and it will take longer to save your emergency fund because you’ll still be making monthly debt payments.
Put all the money you were using towards your starter fund towards debt. Once you’re debt-free, you’re ready to fully fund your emergency savings.
Step Five: Complete Your Emergency Fund
Take all the money you were putting towards debt and/or your starter fund and apply it to your emergency fund.
Repeat until you’ve met your goal.
How much should you save?
Most financial gurus recommend saving three to six months of expenses. This should be enough to cover job loss, major medical catastrophes, serious home repairs, or any other large unexpected expenses.
Try starting with three months of expenses. Once you’ve met that goal, save up to six. Setting smaller goals makes saving less intimidating.
Remember, this is money that will be liquid and easy to access. You shouldn’t put your life savings into your emergency fund. For long-term savings, you’ll probably want to invest.
Most people won’t need more than six months of expenses saved in an emergency fund, but you could save up to twelve if it makes you feel more secure.
Calculating Your Emergency Fund Requirements
The easiest way to calculate the amount you need is to add up all your monthly bills and expenses, and then multiply by three (or six). Don’t include savings. This amount should reflect how much you need to live each month, and savings are not a need.
The calculator below will help you figure out how much you need for three months of expenses. This is a great starting place.
Get Started Now
Start your emergency fund as soon as possible, before you’re stuck on the side of the road with no money. Don’t wait for a disaster to happen before you start saving.
Do it now.
Save your emergency fund in five simple steps:
- Open a savings account.
- Set up automatic transfers.
- Save a small starter fund.
- Pay off any remaining debt.
- Complete your funding.
It’s not hard, but it will take some time. The sooner you start, the sooner you’ll be financially secure.
Do you have any tips for starting an emergency fund? Leave a comment below and let us know!