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National Savings Day is just around the corner, so now’s a good time to start thinking about your money habits, especially when it comes to spending and saving. For many people, a major financial goal is to save up for emergencies or unplanned expenses. In fact, a GOBankingRates survey found that approximately 44% of people are saving for emergencies over retirement, a down payment for a house, and other financial goals.
This isn’t without good reason either. Having a fully-funded emergency fund can give you peace of mind in the face of economic uncertainty. It can also keep you on track when something unexpected — like a lost job or medical bill — comes up that would otherwise derail your financial goals or put you in debt.
If you don’t have an emergency fund, here are some steps you can take to start building one, and quickly.
1. Determine How Much to Save
The first step is to determine how much money you want to save.
“Most financial advisors prescribe six months’ expenses for emergency savings. This fund is meant to cover life’s unexpected black swans — like losing one’s job or a significant health setback,” said Robert R. Johnson, CFA, CAIA, Chairman and CEO at Economic Index Associates.
Of course, everyone’s financial situation is different. Someone who works at a steady job or has minimal to no debt might decide they need less money in their emergency fund to feel comfortable. On the other hand, someone with less job security, a history of health issues, or more responsibilities might want to set aside more money.
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2. Review Your Budget
Review your income and expenses to determine how much you can realistically set aside each month. If you don’t have an established budget, now’s the time to create one for yourself and your household.
“One of the pillars of sound money management is having an emergency fund. When unplanned expenses arise, it is important to have access to cash-on-hand without having to withdraw money from a retirement fund or insurance policy to make ends meet,” said JB Beckett, founder of Beckett Financial Group.
“If you don’t have one yet, start with a deep dive budget analysis,” Beckett continued. “Where are you spending unnecessary money that could be used to fund an essential emergency fund? Take half of the leftover amount each month and fund your emergency fund until you reach a total deposit of at least three to six months’ worth of expenses.”
3. Start with Achievable Goals
Next, it’s time to figure out your timeframe for creating an emergency fund. Even though the goal might be to set aside three to six months’ worth of expenses, you don’t have to do it all at once.
Amy Colton, CDFA, wealth advisor, and founder of Your Divorce Made Simple LLC, suggested starting small. Individuals should “start with a small, manageable goal. Even saving a little bit consistently can accumulate over time.”
Even if you only have, say, $1,000 to start with, that amount could still help in the face of an unexpected bill or expense. Once you reach that first goal, you can then shoot for the next and the next until you have a fully funded account.
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4. Adjust Your Budget and Reduce Unnecessary Expenses
Don’t be afraid to adjust your budget every couple of months, or whenever a significant change occurs in your financial situation. Depending on your situation, you might be able to increase your savings goals this way.
While you’re at it, continue to look for ways to cut back on unnecessary expenses. This can free up more cash to go into your emergency fund or to pay off debts that might be eating into your income.
“The best way to quickly build up an emergency fund if you don’t have one yet is cutting out unnecessary expenses, and putting those savings into your emergency fund,” said Scott Lieberman, founder of TouchdownMoney.com. “This is a quick and pretty easy way to cut back your expenses, re-evaluate your budget, and add to your emergency fund, and it’s one of the least painful ways, too.”
Some ways to reduce expenses include canceling monthly subscription plans, making a grocery list, switching to a cheaper cell phone or internet plan, and negotiating your monthly insurance premiums.
5. Increase Your Income
To meet your emergency fund savings goal quickly, you might need to increase your income as well. There are several ways to go about this.
Lieberman said, “Increasing your income by picking up freelance work, selling items you no longer need, or even renting out space in your home via the app Neighbor is another great way to add to your emergency fund quickly. Sock away all of the money you make with your side hustles until you reach your emergency savings goal, then you can decide if you want to continue with your side hustles or focus on other parts of your financial journey.
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6. Liquidate Your Assets
Another way to quickly save up for your emergency fund is to liquidate your assets, but only those you don’t really need suggested Beckett. For example, if you have an extra vehicle that you rarely use and is paid off, you might be able to sell it and put that money in your emergency fund.
7. Slow Down on Retirement Plan Contributions
You’ll want to consider your other goals and options, but if you’re trying to build your emergency fund as quickly as possible, you might need to stop or reduce your retirement plan contributions temporarily.
“Another [way] is to reduce employer-sponsored retirement plan contributions to the level the employer matches,” said Beckett. “Always contribute to get the matching funds, if at all possible.”
8. Make Savings Automatic
It’s easy to set savings goals and then forget about them, but this can keep you from building an emergency fund. To combat this, automate your savings.
Colton suggested “setting up automatic transfers to a dedicated emergency fund account. This strategy makes saving effortless and consistent.”
“Making emergency savings contributions automatic is a wise approach,” added Johnson. “People should try and automate as many financial decisions as they can. One must make saving money a habit. And habits — good or bad — develop over time. For instance, have an amount taken out of each paycheck and put directly into an emergency fund.”
And don’t forget to celebrate your achievements.
“Keep a close eye on your account balance to track your fund’s growth, and celebrate your savings milestones,” said Holley G. Cary, CFP, vice president and senior financial planner at First Horizon Advisors.
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9. Use a Dedicated Savings Account
Make sure you’re using a separate account for your emergency fund, or you could be tempted to pull money from it when you should be saving it.
“As far as where to invest the emergency fund, one is best advised to simply place it in a money market fund or savings account,” said Johnson. “While I am a huge proponent of the idea that investors take too little risk, taking risk is only prudent if one assumes a long time horizon. Emergency funds, by their very nature, have a short-term time horizon.”
Colton suggested using a high-interest savings account rather than a traditional one as these can help your money grow more quickly.
10. Take Advantage of Windfalls
If you receive an unexpected sum of money, add some or all of that to your emergency fund as well.
“Be on the lookout for opportunities like tax refunds, bonuses, or birthday money to give your emergency fund a boost right from the beginning,” said Cary.
11. Have Separate Accounts for Each Goal
As you max out your emergency fund, you may want to create separate accounts for each new savings goal you have.
“Consider creating separate accounts for various savings goals,” suggested Cary. “Having accounts for designated purposes such as an emergency fund, a vacation fund, or a down payment on a home makes the entire exercise of savings more of a reality.”
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