If you’re thinking about starting an emergency savings fund, we applaud you! Having money saved for a rainy day is one of the best financial decisions you can make.
You never know when you’re going to get laid off, experience a medical emergency, or when your car is going to break down in the middle of the highway. Having money set aside for these unforeseen disasters can help you sleep at night. Read on to find out exactly how to start an emergency fund!
Set Up A Separate Account
Having a dedicated account to keep your emergency money in is very important. When you decide to get serious about safeguarding your financial future, a call or trip to your bank will most likely be in order.
Here’s why you need to set up a separate account:
- Out of sight, out of mind – This might seem like an obvious trick, but keeping your emergency savings where it isn’t easily accessible will truly make a difference when it comes to reducing the temptation to spend it. Keeping your emergency money in a separate account also allows you to understand exactly how much you have tucked away, without having to calculate how much you need for your regular expenses.
- Give your savings room to grow – The money in your checking account isn’t making you money—and that’s okay— because you’re going to spend it quickly. Your emergency fund, however, should be making you money, since (hopefully) you aren’t going to need in the immediate future. Ask your bank or financial advisor about high-yield savings accounts that will grow over time.
- There are different kinds of savings – Even if you already have a checking and savings account, it’s helpful to open a new savings fund that’s dedicated solely to emergencies. This way you can save for things like big purchases, vacations, or college without getting your emergency cash tangled in the mix.
- Consider Setting Up Auto-Transfers – There are many options that allow you to schedule transfers from your checking account to your savings account automatically. This can be extremely helpful because you’ll have fewer opportunities to drop the ball on growing your emergency fund by missing payments.
Plus, if you set up the transfer to occur on your payday, it’ll feel like the money was never there, meaning you’re less likely to miss it.
Remind Yourself Why You’re Doing This
The next time you find yourself wanting to tap into your emergency fund to book a plane ticket to the Bahamas, it’s helpful to remind yourself exactly why you need this emergency fund.
Having money available means you won’t have to pawn your family heirlooms when a pipe in your kitchen bursts. If you end up owing money to the IRS when tax season rolls around, you won’t be looking into tax lien help.
It might not be exciting, but saving money is worth it.
Put a Pencil to It
As you outline your emergency fund game plan, you’re going to need to decide exactly how much money you want to contribute, and how often you’re going to set up transfers.
Here are a few key steps to determining what’s realistic for you:
- Track ALL of your expenses for a month.
- Evaluate how much money you have left at the end of each month, after your expenses.
- Identify areas where you can reduce your monthly spending.
- Decide if you want to contribute to your fund monthly, weekly, or even daily.
Once you feel like you understand the ins and outs of your budget, aim to put at least six months of living expenses into your savings. This may take a while, but having a half years’ worth of cushion is the general rule of thumb in terms of building a solid financial foundation.
Every Penny Counts
No matter how much you’re able to contribute to your emergency fund, being savings-minded and thinking about your future is a great first step.
As time goes on and you grow your fund, you can start worrying less about unforeseen expenses. It’s a win-win situation, since in the best-case scenario you won’t have to use your emergency fund, and in the worst-case scenario it will be there for you when you need it.
Your future self thanks you!