No one warned us when we were growing up that adulthood wasn’t just hard – it’s also expensive. Younger versions of ourselves never envisioned an adult life spent bleeding money on random stuff.
Having an emergency fund savings account is a crucial part of successful adulting. By storing money in an emergency fund, you can cover unexpected expenses without dipping into your regular checking account.
Nothing is worse than struggling to have enough money to cover essential monthly expenses because an emergency happened that dwindled your cash flow. Having money set aside in a dedicated emergency fund ensures you can cover essential expenses and save enough money in case of unplanned expenses.
What is an Emergency Fund?
An emergency fund is money you keep in a separate account from the money you spend on essentials. Money in an emergency fund is extra cash you save for expenses you didn’t plan to encounter.
An emergency is a sudden and urgent matter that randomly occurs without planning. Many times, emergencies catch us unprepared and off guard.
Many emergencies end up costing you money. And if you don’t have money to cover these events, it can cause serious damage to your bank account. You can end up without the funds to cover your normal bills, leading to late charges and lowered credit scores.
Why Build an Emergency Fund?
Emergencies never occur on a schedule. Quite the opposite. They usually happen when you’re least prepared.
Having an emergency fund means you’re ready for unforeseen events without the stress of figuring out how to allot your funds to pay for everything.
Emergency funds reduce the stress of experiencing something wrong by allowing you to resolve the situation immediately. When you have emergency funds, you don’t experience a dramatic hit that can affect your current situation.
How Much Do I Need to Start Saving for an Emergency Fund?
Many believe they can’t have an emergency fund because they never have extra cash. They incorrectly think a large sum is the only way to start an emergency fund.
It’s good to dedicate large sums to your emergency fund savings account, like when you receive your tax refund. But you don’t need much money in a savings account before starting an emergency fund.
A good starting goal for your emergency fund is to have at least $1,000 in your savings account. That amount can be enough financial buffer to handle a small, unplanned expense.
But if you want to be extra safe and have more money for major issues, set savings goals to store the money for three to six months of expenses.
While you want to try saving enough money to cover several months’ worth of expenses, your emergency fund goal should be realistic and obtainable. While it’s good to be ambitious to cover any unplanned expense, don’t be unrealistic. Having goals that are too advanced can steal your motivation and make it difficult to work towards your goals.
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How to Start an Emergency Fund?
Establishing an emergency fund is an important part of a secure financial well-being. It is possible to start saving money and hiding it in a coffee can like your grandparents used to do decades ago. But the best way to manage your savings and reach your savings goal is to establish a plan and stick to it.
1. Determine Savings Amount
The first thing you need to do when you’re starting an emergency fund is decide on a savings goal. The purpose of emergency savings is to have the money to cover unplanned expenses without going into debt.
To determine how much money you need in your emergency savings fund to stay secure, consider several factors:
- Total monthly expenses
- Income stability
- Household number
- Number of people with income
The amount you want to save should not scare you but encourage you to save automatically. Auditing your finances, income sources, and budget can be a great way to set a realistic savings goal.
As I mentioned above, a great starting point is to build a $1000 emergency fund. Subsequently, gradually expand it to encompass a span of 3 to 6 months’ worth of expenses.
Also, consider potential unexpected expense events that may arise. Add this amount to your three to six months’ worth of expenses.
2. Decide Where to Keep Your Money
Once you have a goal, you need to decide where you’ll keep your savings accounts. Keeping your spare cash in a coffee container, freezer, or under your mattress is no longer a good idea.
These days, it’s better to keep your extra money in savings accounts with a federally insured bank. A high-yield savings account can allow you to earn interest on the money you save up. These bank savings plans link to your checking account. So, you can set up a direct deposit schedule for automatic savings every pay period.
A National Credit Union Administration bank can be a great choice for your savings while having an insurance policy to protect your funds. You can get into the money market and invest funds if you have extra money. But this money can get tied up and take time to access. The actual value of your money can also fluctuate.
There are a handful of really great high-yield savings accounts; our personal favorite, hands down, is CIT Bank.
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3. Find Money to Put Toward the Emergency Fund
Once you’ve created a savings goal to keep you out of debt, it’s time to figure out how to find the funds to add to your account.
The first step is to analyze your budget. You can use a budget tracking worksheet to help you split essential versus nonessential spending.
Items that go into the essentials category are things you must pay for each month, like shelter, utilities, food, and everyday necessities.
On the nonessential side, you’ll put things like entertainment, coffee and dining out, shopping, subscription services, and vacations. Nonessentials are things you enjoy but aren’t necessary for your survival.
The best way to add money to your emergency account is to cut out what you want instead of need. If there are comforts you don’t want to do without, you’ll need to find ways to increase your income.
Establishing extra money-making routines is crucial to increase your financial security and prepare for emergencies. You can get extra hours at work, start a part-time job, or establish a side hustle. You can make extra money while making your home more liveable by selling things you no longer use or want.
4. Establish a Routine for Adding Money to Your Emergency Fund
After you’ve got everything else in place, you’ll need to establish a routine for adding money to your emergency fund.
You can use any money you get as your savings cash reserve. Get into the habit of adding extra money to your savings whenever you get any.
The easiest way to grow your emergency stash is with recurring transfers from your regular bank account. It is highly recommended that you use a separate bank account for your emergency fund, than your regular savings account for your extra funds.
This simple task will keep you from spending your emergency fund on everyday items.
You can set up automatic transfers through your bank or credit union on a schedule that works for you. Some people transfer a small chunk of their pay weekly, while others may only add money to their savings once a month.
Along with cutting back on unnecessary expenses and establishing regular automatic transfers, cash-back apps, cards, and deals are another way to get money for your savings.
Establishing and sticking to a budget is essential to growing an emergency stash. Grab our free budget planner to help you keep track of your money. Or grab our paid Budget Binder upgrade if you want a full understanding of your money situation. We used this binder to get out of debt and start towards a $100,000 retirement fund.
Reasons for Starting an Emergency Fund?
The purpose of an emergency fund is to help you reach financial security by always having money saved away to account for unexpected events.
When you have money put away to cover any emergencies that may arise, you don’t experience a hit to your regular finances. Having an emergency fund helps you have enough money for everyday expenses. And it can help you create enough savings to reach your financial goals.
Unexpected Expenses
One of the biggest reasons to establish a separate savings account is to have the funds to handle financial emergencies.
Life is full of surprises, and they aren’t always good ones. If an unplanned expense occurs when you’re not prepared, it can cause serious stress to your finances and your mental health.
You may experience unexpected costs like:
- Car repairs
- Home repairs
- Vet bills
- Unplanned down payment
- Healthcare bills
Living Expenses
A strong savings account will contain enough funds to cover your monthly living expenses for one or several months.
It’s important to cover expenses in cases of job loss, which rarely happens at a good time. If you have a multi-person income household, you’ll need to handle the burden of lost wages from one or more people.
When you have multiple people contributing to the household finances, it’s a smart idea to know the financial contribution abilities of each individual. Create a savings schedule that allows appropriate funds for each person’s income range.
Medical Bills
Staying healthy can be costly, especially when unexpected medical costs come up. Having extra money stored in a savings reserve can help you pay off a medical bill faster than if you don’t have money put away.
Even if you’re completely healthy, preparing for the unexpected is best. You can save up a target amount in case of medical emergencies.
Or you can create a medical emergency fund by calculating your insurance expenses, such as yearly deductibles, specialty care, and emergency fees.
Unplanned Home Repairs
Natural disasters can occur at any time and strike any person. So can basic home emergencies like a leaky roof, a defective appliance, or something broken.
Many home repairs can be costly expenses that can cause a hit to your bank account. Without the funds to handle the repair, you can experience financial issues like late payments, going into debt, maxing out a credit card, or overdrawing your bank account.
Paying Off Debts
An emergency expense can also come in handy for paying off debts. While debt is less of an emergency in most cases, there can be times when it can cause a major issue.
Credit card companies and other financial institutions can take action if you get behind on payments. For crucial life needs like shelter, food, and water, not having the money to cover costs can cause significant consequences.
You can lose your home, get your utilities turned off, or have your income wages docked to repay your debts. If you struggle to cover your finances before a shortened check, you’ll find it more difficult to manage if you get a garnishment.
Prepare Your Finances With an Emergency Fund
Putting your money into separate savings accounts can keep you covered during unplanned emergencies. You’ll always have money to cover all your expenses, whether your monthly bills or an unexpected cost.
By having dedicated emergency savings to dip into when something unexpected occurs, you will never have to worry about running out of money to cover your essential expenses.
Final Thoughts on Starting an Emergency Fund
Establishing an emergency fund is a pivotal step towards financial security and peace of mind. Life is unpredictable, and having a financial safety net can help you navigate unexpected challenges without derailing your long-term goals.
Choosing the right place to store your emergency fund is equally crucial. Opting for a high-yielding savings account ensures that your money not only stays easily accessible but also grows over time. While the returns may not be astronomical, the interest earned can contribute to the overall growth of your emergency fund, providing an added layer of financial stability.
Remember, the purpose of an emergency fund is to be there when you need it most. By consistently contributing to your fund and selecting a high-yield savings account, you’re not just preparing for the unexpected – you’re actively building a foundation for a more resilient and secure financial future. Start today, and empower yourself with the confidence that comes from knowing you’re prepared for whatever life may throw your way.
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