Having an emergency fund is critical for preparing you for the unexpected. It can cover expenses like car repairs, roof leaks, and job loss that prevent you from making monthly payments.
Establish a goal and create an emergency fund savings plan. Then, set up automatic transfers from your checking account into the fund on a regular basis.
1. Set a Goal
Building an emergency fund is essential to being able to cover unexpected costs. These could range from car repairs and medical bills, to even loss of income.
To determine your goal, calculate all essential monthly expenses such as housing, utilities, food and transportation. Multiply this by however many months you wish to have in your emergency fund to calculate how much money to save.
Once you’ve identified your target savings amount, start working toward it. Pick a goal that feels achievable and provides motivation, such as saving $100 by the end of the month or $1,000 by the end of the year.
It’s also beneficial to have a strategy for adding to your savings when unexpected money appears, such as birthday or holiday cash gifts, work bonuses and tax refunds. Doing so can help build up an emergency fund faster than anticipated.
2. Create a Savings Plan
An emergency fund can protect you against unexpected expenses, like a car crash or medical bill. It also helps you recover faster after suffering financial setbacks and helps avoid future debt crises.
One way to build an emergency fund is to set aside money in a designated savings account. Make sure this money remains separate from other savings and do not access it unless an actual emergency arises.
Goal to save for three to six months’ worth of expenses. While that may seem like a long time to begin saving, it’s achievable and will give you the motivation to keep saving.
Another way to increase your savings is by setting up automatic transfers from your checking account into savings. That way, you’ll be contributing money each month without having to think about it.
3. Reduce Your Expenses
Building an emergency fund for unexpected expenses is the best way to go. For instance, you could reduce your cable subscription or stop paying for gym memberships that you rarely use.
Once you’ve identified your savings goals, create a budget to monitor spending. Then, set up automatic recurring transfers from your paycheck that go straight into the savings account.
Ideally, you should save between three and six months’ worth of expenses. However, this may not always be possible for everyone.
If your goals are unattainable, try making some small cuts to your budget or switching to part-time employment. Or if you receive a tax refund each year, put some of it towards building up an emergency fund.
4. Start Small
An emergency fund can be a lifesaver when it comes to your financial security. Without one, you could find yourself forced to rely on credit cards, personal loans or asking family and friends for financial help.
Building an emergency fund takes time; you may need to set aside several months’ worth of expenses in order to reach this objective.
Begin by setting aside a small amount of money each day – perhaps $5 – and increase it as you make progress and build up momentum.
Add to your emergency fund whenever you receive additional money, such as tax refunds, rebates, bonuses from work or cash gifts from loved ones.
Saving for emergencies will give you the assurance needed to continue saving, making it easier to reach your goals. Starting small amounts also prevents you from feeling overwhelmed by the task at hand; instead, it motivates you to take action and build up a larger emergency fund for unexpected expenses.