When your tire blows out on the highway, you break an ankle on vacation or get laid off, having emergency savings can keep you from sinking into credit card debt and your credit score degrading just to stay afloat.
An emergency fund is your safety net when faced with the unexpected. Having one should be among your most important financial goals if you don’t currently have a stock of cash to access in a crisis.
How to start an emergency fund
Follow these steps to start creating an emergency fund today, so you can deal with your next unexpected predicament without maxing out credit cards, taking out a loan, or taking advantage of your home ownership.
1. Determine how much money you need to save in an emergency
The general rule many personal finance professionals promote is to have three to six months of expenses stored in your emergency fund.
This does not necessarily mean that you need to triple your household’s monthly income at least. But ideally, you’ll have at least three times the amount you need to keep your family running for a month.
Look at your budget — or bank statements for the past few months — to see how much money you need to live. This doesn’t include what you spend eating out, on clothes, or on cable. These things can be easily disposed of if you have to get down to a file bare budget after losing a job.
Even when considering only your basic monthly expenses, you may feel intimidated trying to save three to six times that amount. Start by breaking your savings goal into smaller pieces. Focus on saving $500 and building from there to eventually reach your emergency fund goal.
Make each small goal specific, measurable, achievable, relevant and timely. People tend to be more successful when goals are framed this way smart goals.
You’ll hear some financial experts, like Dave Ramsey, talk about having an emergency fund of just $1,000. (Ramsey’s famous money-management plan — known as “baby steps” — urges its followers to save three to six months on living expenses, but not until all non-mortgage-related debts are paid off.)
However, keep in mind that your emergency fund is all about giving you peace of mind so that you will be able to weather crises and cover unexpected expenses. Certified financial advisor Kumiko Love told The Penny Hoarder that she tried Dave Ramsey’s plan but didn’t stick to it because as a single mom she thought $1,000 wouldn’t be enough to weather a real emergency.
“I was up at night worrying I didn’t have enough safety in my emergency fund,” Love said.
Also keep in mind that if your car insurance deductible is $1,000, and you get into serious fenders, you won’t have enough money saved to cover car repairs plus medical expenses and any other costs.
Although expenses of three to six months are the norm, your goal for your emergency fund may vary depending on your condition. If you are the sole breadwinner for your family or you work in a field where it is difficult to get another job quickly in the event of a layoff, you may want to save more than six months in living expenses.
2. Find out where to keep your emergency fund
It’s important to keep your emergency savings liquid and easy to access. Avoid holding your money in a savings vehicle where you will face penalty fees by withdrawing it in an emergency, such as 401(k) account or five years certificate of deposit. Also, although investing your savings can help them grow, you don’t want to risk losing your emergency funds.
Storing your money in a checking account is another option, although most won’t earn you much interest.
Make sure you store your emergency fund in an account where you won’t be tempted to spend money. Consider an online bank account or a bank account without a debit card if you feel you may be tempted to make unnecessary withdrawals. Placing your savings in a different bank or credit union than where your main checking account is located will add another layer of class.
3. Find ways to add to your emergency fund
A combination of regular savings contributions and gross deposits will build the balance quickly.
Ask your employer to split your direct deposit so that a portion of each paycheck goes to your emergency fund, or set up automatic transfers to your savings account after each pay day. When you don’t see the money in your main checking account, you won’t be tempted to spend it.
If your budget is tight, you can cut back on your spending by switching to Cash Envelope System, cancel monthly subscriptions , join buy nothing Group or switch to less expensive providers. Or you can increase your income by taking a side hustle or work a Second, part-time job وظيفة.
You can also increase the amount of money in your emergency savings account by depositing any additional cash you receive from a one-time windfall. sell items around your home that you don’t use or can give away Crash with friends for a week and Rent your home on Airbnb. Transfer your work bonus and income tax refund to the Rainy Day Fund before you spend a dime.
4. Know when (and when not) to tap into your savings
It is not enough to know how to start an emergency fund. You should also understand what counts as a good reason to withdraw money – and when you should leave it alone.
It can be tempting to see thousands of dollars in your account, but avoid using that money unless you have unexpected expenses due to real emergencies.
A good rule of thumb is to avoid spending your emergency cash on predictable expenses, such as routine car maintenance, a large annual insurance bill, or summer camp enrollment. You don’t want to create an emergency fund just to spend that money on expenses you could have been prepared for. Create separate sinking money rather than those savings goals.
And remember, once you’ve spent the money from your emergency fund, be sure to replenish it so you’re ready for the next big thing that comes your way.
Nicole Dow is a senior writer for The Penny Hoarder.