You probably know you need an emergency fund. It’s one of those things that just make common sense. You know that one of these days your car will need a major repair, you’ll get sick or you could lose your job. You could lose your house or apartment because your landlord increased your rent by 20% and you must move within the next 30 days. If you don’t have emergency savings, you’ll have just one option – to use a credit card. According to an article published on CNBC.com, Bankrate conducted a survey that revealed what consumers would do if they face an emergency situation. 28% said that they would borrow from family or friends and would even use their credit card. That would mean adding on debt and if you’re basically living from paycheck to paycheck that could soon become a problem.
If you haven’t been building an emergency fund it’s probably because you think of it as a big deal that would require a lot of scrimping and saving. But this doesn’t have to be the case. In fact, you can build an emergency fund and it can be practically painless.
#1. Calculate how much you will need
The first step is to sit down and determine how much you will need. Most experts suggest that your emergency fund should be the equivalent of 6 to 9 months of your living expenses. In an article published on MoneyUnder30.com, it is revealed that only 23% of Americans have emergency savings that will last to 6 months. This would include your fixed expenses such as rent or mortgage payment, your auto loan (if applicable), your insurance, transportation costs and utilities. If you have student loans don’t forget to include them.
Next, write down your discretionary expenses such as clothing, entertainment, eating out, food and your personal items. These numbers don’t have to be exact, just a rough estimate will do at this point. Add all of this up and you’ll have a good idea of your monthly expenses. Now, multiply this by six. Don’t get discouraged if this number seems overwhelming. You could start by multiplying your monthly living expenses by three, which may be a more manageable number, and then build on this going forward.
#2. Determine where you will keep your fund
It’s important to keep your emergency fund separate from your normal checking account. If you co-mingle the two you could easily end up spending part of that fund without even realizing it. Credit unions are good places for an emergency fund because they usually allow you to start an account with a smaller deposit than will a bank. Another good place to stash your emergency fund is in online savings account. Three of the most popular of the online banks are Synchrony Bank, Ally Bank, and Barclays Dream Account. You might consider keeping your fund in separate places such as cash in a lock box in your home, savings bonds, a credit union, and an online savings account. That would make it even more difficult for you to tap into your fund, which would be a good thing. According to an article published on Dave Ramsey, the financial guru suggests that it can be kept in a checking account or money market account.
#3. Treat your saving as if it were just another bill
Once you’ve calculated how much you can save each month, establish a savings goal add that amount to your budget as if it were just another bill. You may find that you’ll have to shave some other category such as clothing or entertainment to accommodate this but it will be well worth it in the long term.
#4. Set up automatic withdrawals
Here comes the practically painless part. Set up automatic withdrawals from your checking account to wherever you have your emergency fund. This becomes almost painless because psychologically you’re less likely to miss money you never see. While you’ll have a bit less to live on you’ll soon grow accustomed to this and may even forget that you’re saving money each month.
#5. Don’t be in a rush
Don’t think that you have to create your emergency fund in just a few months. Take it slow and easy. If you save just $10 a week you’ll have $500 saved at the end of the first year. Double that to $20 and you’ll have $1000 saved. And don’t make the mistake of establishing an unrealistic goal. If you can afford to save only $10 a week that’s okay as slow and steady wins the day.
#6. Remember your emergency fund is only for emergencies
One of the most common problems people have with their emergency funds is forgetting about those one-time expenses that crop up annually. For example, maybe you pay your auto insurance premium annually, need an annual eye examination, visit your dentist once a year and, of course, there’s Christmas. Don’t forget to budget for these annual expenses or you might find you have to dip into your emergency fund to cover one or more of them. You can make this difficult by doing as advised in #2 and that’s putting your emergency fund where it will be hard to access the money.
If you find that you’re having a hard time funding your emergency savings account here are a few tips that could help. First, sit down and have a talk with yourself. Ask if there aren’t areas where you could cut back. We’d be amazed if you don’t find some. Also, try to bank any extra income. For example, if you were to get a raise don’t just spend the money. Put it away in your emergency fund. Ditto if you get an income tax refund. Will you soon be paying off an auto loan or some furniture? That’s also money that could go in your emergency fund.
Have you heard of Digit? This is a free app that you link to your checking account. It analyzes your income and then automatically transfers a little bit of money to your Digit savings account each week. This will be from $5 to $50 – depending on your income — but never more than you can afford. When your Digit account reaches a certain level you move the money to your emergency fund.
You can also make a habit to stash your spare change. At the end of every day gather up those dollar bills or coins you have a rattling around in your pocket or wallet and put that into your emergency fund.
Finally, sell stuff you don’t use. You probably have a lot of items just lying around gathering dust. Figure out their value and then sell them on eBay or at a consignment store – whichever you’re most comfortable with.
It will happen quicker than you think
Were you shocked when you calculated how much you will need for an emergency fund? Well, take a deep breath and relax. Remember this is a goal and not something you have to achieve in just a year. Quit thinking about that ultimate goal and focus instead on how much you need to save each month to reach it. Stay the course, keep tucking away some money each month and before you know it you will have reached your goal and will be prepared to face any unexpected emergency comes your way.