You can plan out all your expenses, keep a close eye on your budget, and track your spending, but no matter how careful you are with your money, things don’t always go according to plan.
That’s why having an emergency fund is so important. Yet, a recent survey found that over 1 in 5 Americans don’t have an emergency fund[1].
It’s easy to understand why. Americans are stretched and sometimes its hard to make ends meet. And while we’re not saying this is going to happen overnight, if you find a little extra room in your budget, a healthy emergency fund may be within your reach.
What is an Emergency Savings Fund and Why do You Need One?
The purpose of an emergency fund is straightforward. It’s money that you put aside solely for the purpose of dealing with any emergency expenses that come your way. Things like emergency medical expenses, car repairs, or important home repairs could all be reasons why you might end up tapping into your emergency savings.
They’re also useful because they can help you avoid taking on debt to handle your emergency. While credit cards and short-term personal loans – like some installment loans – can be useful in certain situations, having emergency savings to fall back on can help you avoid taking on debt in the first place.
How Much Should You Save in Your Emergency Fund?
It’s important to be able to answer this question because it’s going to give you a target to aim for. The answer is going to come down to all sorts of different factors like your monthly budget, your income, your lifestyle, and more. Generally, it’s a good idea to aim to have three to twelve months of expenses saved. So, how do you figure out where you fall on the spectrum?
Let's look at two different examples:
Example #1
You and your partner both have an income, have been employed steadily for over a decade and rarely fall behind on debt payments. In this kind of situation, three months of living expenses is likely enough.
Example #2
You’re the sole breadwinner of your household, are single, you work on commission, or you’re self-employed, your situation may not be as steady. If any of that sounds like you, it might be safer to aim to save six months worth of emergency savings.
If panic sets in when you look at the final number, it’s understandable. Just remember that this is a process, and it’s going to take time and patience. Just do your best to start putting a small amount away from each paycheck and feel free to make adjustments along the way as things in your life change for the better or worse.
Where Should You Put Your Savings?
When it comes to the specifics of where you’re actually putting this money, you’ll want to make sure you have relatively easy access to it, but not so easy that you’ll be tempted to spend it.
Think about putting your money in a high-interest savings account that you can access without penalties. This way you’ll have some peace of mind knowing that you can withdraw these funds in an emergency.
3 Steps to Building an Emergency Fund
Like we said earlier, the process of building a healthy emergency fund can be long, but the steps we’re going to walk you through are fairly straightforward and can be used for budgets of all sizes.
1. Create a Budget
If you’re still trying to figure out how big your emergency fund should be, building a budget if you don’t already have one is a good place to start.
There are plenty of budgeting guides or tools out there to help you get started, the general place to start is by making a list of all your regular expenses for the month, as well as your income. What you spend money on is probably going to change from month to month, but if you go through your bank statements for the last six months and get an average amount, you’ll give yourself a better idea of how much you typically spend in a month.
Once these things are tallied up, you should be able to see how much extra money you have that could start going towards building your emergency savings fund.
2. Set a Realistic Savings Goal
Now that you have a better idea of how much money you spend every month, you can start to put your savings goals into place. It can be fun to dream big, but you also want your savings goal to be realistic. With a reasonable goal in place, you’ll have an easier time coming up with a manageable timeline, and you’ll probably give yourself a better chance at hitting your final goal. You don’t want to get discouraged along the way, so the more realistic your goal is, the more likely you are to see the process through till the end.
3. Make Adjustments to Your Savings Goal
At this point, the hope is that you’ve created your budget, figured out how much money can go towards your emergency fund, and set a savings goal. Now it’s time to put things on autopilot and start saving, right? Well, not exactly. The truth is, your expenses aren’t going to stay the same, and budgets can change over time.
For example, maybe you’ve run into some emergency expenses along the way and tapped into your line of credit to help deal with the costs. If that’s the case, you may need to take some of the money you planned to put towards your savings and use it to pay back what you’ve borrowed instead. Or maybe you or your spouse got a promotion or pay increase at work, and you can start to put even more towards your emergency fund. In either case, you may want to make some tweaks to your original savings goal based on the ups and downs of your household’s finances.
Start Working Towards Your Emergency Savings Fund Today
We know it’s not always easy to find extra money lying around in your budget, especially when you need emergency money to help you through a tricky time. But if you stay focused, follow a clear plan, and stay patient, you can start to slowly work your way towards an emergency savings fund that can give you a little comfort in tough time.
Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.
[1] https://www.bankrate.com/banking/savings/emergency-savings-report/#job-loss
