Life is unpredictable. When the unexpected happens, it’s important to be prepared and have some money set aside. Without it, you’ll most likely end up turning to your credit cards and digging yourself into debt. The better route is to build an emergency fund so that you’re ready when the unexpected happens. Today, most people, 60% according to CNBC, couldn’t even cover a $1,000 expense without having to borrow the money. A simple car repair or emergency room visit would have to be paid for using credit.
To build an emergency fund isn’t difficult, and it doesn’t have to be done all at once. You may think that the only way to save enough money for an emergency fund is to become Ebenezer Scrooge, but that’s not true. You merely have to start.
Calculate How Much You May Need
Generally, it’s recommended that you save six to nine months of living expenses for an emergency fund. Start with all your bills, such as mortgage or rent, phone, utilities, car payment, insurance, student loans if you have them, and your average grocery bill.
Next, make a list of discretionary expenses, such as clothing, entertainment, and eating out. Add these together and you’ll get a good idea of how much you spend each month. Now, multiply that by six, and you’ll know how much you’ll need to save for a six-month emergency fund.
Determine Where You’re Going to Keep It
You can’t keep your savings stuffed inside your mattress, and keeping it in your checking account isn’t any better. It’s too easy to spend it without realizing it. Instead, stash your funds in an account that’s dedicated to your emergency savings.
Credit unions are usually a good option because they let you start with a smaller initial deposit than banks do. Online banks often offer better rates because they don’t have the added expenses that go along with branches, such as real estate and employee costs. They also tend to have lower fees. Ally Bank, Capital One (which bought INGDirect) and CIT Bank are popular online banks.
Treat Your Savings Like It’s a Bill
Determine how much you can afford to set aside each month and consider this your Emergency Fund Bill. Just like your rent or mortgage, it must be paid each month before you do any discretionary spending.
Set Up Automatic Withdrawals
Wherever you have your emergency fund, set it up so your Emergency Fund Bill is taken from your checking account and deposited into your emergency account on the same day each month. It’s painless!
Saving six months’ worth of expenses takes time; no one can build an emergency fund overnight. If you can set aside $10 a week, in a year, you’ll have $520. If you can manage $20 a week, you’ll have $1,040 after a year. It’s okay to be the tortoise and not the hare!
Don’t Spend Your Emergency Fund on Non-emergencies
It’s tempting to dip into your emergency fund for things such as Christmas shopping or vacations, but don’t! Be sure to include holiday spending and yearly bills such as insurance, taxes, or regular car maintenance when you create your budget. Only use your emergency fund on actual emergencies such as unexpected car repairs, injury or sickness, hospitalization, job loss, etc.
Other Tips to Help Your Emergency Fund Grow
If you’re living paycheck-to-paycheck, to build an emergency fund may be difficult, but it’s achievable and important.
- Look for places to cut back: Bringing your coffee or lunch to work instead of buying it at an overpriced shop or fast food restaurant and eating out less frequently are ways you can save. Set your goal lower if you need to, and find it in your discretionary spending.
- Bank any extra money: If you get a raise or bonus, tax refund, or any kind of monetary windfall, put it in your emergency account.
- Download an app: Apps such as Digit and Acorns can help you save money easily. Digit calculates what you can afford to save and does it for you, while Acorns rounds up your purchases to the nearest dollar and saves or invests it for you.
- Set up a change jar: Instead of using exact change when you make a purchase, throw spare change in a jar and periodically deposit it into your emergency account.
- Have a yard sale: Getting rid of all that stuff you don’t use can give you more space and more money. If you don’t have the room at your home for a yard sale, do it on a local online yard sale website or eBay.
Once saving for your emergency fund has become practically painless, you may forget you’re doing it. Who knows, maybe saving for your emergency fund will become second nature and you can stretch your savings beyond the nine-month mark. Maybe you can make it a permanent habit!