How to Build an Emergency Savings Fund: Your Guide to a Confident Financial Future
Published on: November 9, 2023
How confident do you feel in your financial situation? Should you suffer a personal or professional crisis, would you be equipped to weather the storm for a few months? If the answer is no, it’s high time you establish (or expand) your emergency savings fund. The earlier you establish your emergency fund the better. Consider starting your emergency fund in college or once you start your first job.
Most people recognize the need for emergency savings but struggle to set aside these funds. Between daily costs and the constant temptations to spend on discretionary items, it’s easy to see why this is so frequently neglected. In the worst-case scenario, however, the consequences can be dire. Continue for a powerful peace of mind for those struggling to start.
In fact, data from the Fed’s 2022 Economic Well-Being of U.S. Households survey indicates that over one-third of Americans would be unable to cover a sudden expense of $400 or more. If you relate, it’s time to act.
How to Start an Emergency Savings Fund
There’s more to establishing an emergency fund than simply setting aside a few bucks each month. This needs to be a purposeful effort, complete with a detailed reflection on your current financial goals and challenges. The absolute most important step, of course, is to start an emergency fund in the first place — and to make it a priority. Follow these suggestions to get started:
Assess Your Current Financial Standing
Do you actually know where you stand, financially speaking? A baseline understanding is absolutely crucial. It’s possible that you already have enough in savings to earmark for an emergency fund without compromising your other financial priorities. You cannot possibly know this, however, until you complete an in-depth assessment of your financial situation.
As you embark on this process, consider: what typically gets in the way of creating a robust emergency fund? Is it possible that you have a better cash flow than you think? Take a close look at multiple facets of your financial situation to get a better overview and to determine the extent to which you can save for your emergency fund.
Assess Your Expenses
Building a solid emergency fund will prove difficult if you’re not disciplined with your budget. This begins with tracking your expenses and determining where you can stand to cut back. A spending app may be your best bet, as this provides a thorough overview without requiring a lot of extra work on your part.
Your expenses will largely be divided into two main categories: recurring costs and those that change from month to month. Recurring costs such as rent or car payments are easy to plan for, but others — like food, clothing or even gas — may change dramatically from one month to the next.
As you examine your budget, determine how these types of spending average out on a weekly or monthly basis. Pinpoint an absolute minimum that you could live on in a pinch, plus a more realistic total that reflects average spending when things are going well.
Review Income and Earnings
Budgeting will no doubt boost your savings efforts, but you can also expedite the process by upping your income. This is typically easier to track than expenses but may be more difficult to improve.
Begin by examining your wage stubs or other documentation of your earnings. How does this stack up against the strict budget you’ve established? Ideally, you will have at least 20 percent left over each month to set aside for your emergency savings account.
If, despite going as strict as possible with your budget, your income leaves enough wiggle room for saving, consider whether you can bring in additional earnings. For many people, this may mean seeking a side hustle or a part-time job — but this certainly isn’t the only option.
Confidently seeking a raise is often the best path to improved earnings — or, in a tight labor market, you could potentially find a new job that pays more. An even easier option? Placing your money in a high-interest account. That extra interest can add up quickly and snowball your savings efforts.
Where to Establish an Emergency Fund
Once you know how much you can contribute to your emergency fund — and how you can increase those contributions over time — you can start to think of where, exactly, your emergency resources will be kept. As we’ve discussed, you can use these funds to earn interest — but you also want maximum liquidity, so you can access critical funds at a moment’s notice.
Many people opt for money market accounts. Depending on how they’re funded, these can provide a decent interest rate while also allowing you to easily move money around as you see fit. Otherwise, a high-yield savings account may be your best bet.
If you already have a checking or savings account with a trusted bank or credit union, you can set aside a separate account for your emergency fund. Otherwise, do your research to determine which bank will be the most reliable while also providing an excellent interest rate. Be mindful of security policies and features, as bank and credit union breaches are increasingly common these days.
Emergency Fund Process and Steps
You’ve decided that you’re ready to establish an emergency fund and prepare for a future worst-case scenario that you hope will never arise. Now, it’s time to get extra purposeful: how much will you save and how will you build saving into your daily life? We’ve highlighted several key steps and strategies to implement along the way:
Setting a Goal to Guide Saving for Emergency Fund
A goal-oriented approach is far more likely to drive significant savings. Your overarching goal should be realistic but also, ambitious enough to convince you to make significant changes to your current spending and saving habits. Choose an objective based on the financial details you’ve already uncovered, such as your current expenses and typical spending patterns. Use this emergency fund goal as a guide to help you develop your savings plan.
Keep in mind that the standard rule of thumb for an emergency savings fund involves anywhere between three- and six-months’ worth of living expenses. Don’t make the mistake of confusing this with six months of income, which could either be far higher or far lower than it takes to get by. Instead, use your tracked spending habits (and your ideal budget) to determine what you might spend during a span of several months.
This is your long-term goal, but you will also need several smaller goals to move you in the right direction. For many people, this takes the form of a monthly emergency savings goal, which should be separate from your general savings. It should also not be confused or muddled with savings dedicated toward specific goals, such as buying a home or planning for a vacation.
Next, determine how soon you hope to have your full emergency savings fund established. Sooner is always better, but that doesn’t mean you have to drastically alter your way of life in the meantime. Many people feel comfortable with dedicating between six months and two years to this endeavor. Even if you don’t achieve your full savings goal right away, anything you set aside will remain useful in the event of an emergency.
Make Saving a Habit
If you’ve been casual about saving, it’s time to up your game. This needs to be built into your way of life. From here on out, every activity or purchase should be viewed through a savings-oriented lens. Be mindful not only of immediate cost-cutting, but also, of long-term value and sustainable reductions in consumption. Adopt this mindset, and you’ll find it a lot easier to make progress over time.
Opportunities to Spend Less
Name an area of your life or a top spending category and you will certainly find a myriad of ways to cut back. All the typical advice applies limit gym memberships, streaming subscriptions, eating out, and other discretionary costs. Beyond this, brainstorm creative ways to reduce your spending. Look to personal finance resources such as podcasts, YouTube videos or even Reddit for unique insights.
Top ideas include:
- Assess your cell phone and internet plans to determine if you can save by switching plans.
- Weatherize your home in the winter — and use warmer clothes and heavier blankets so you can set the heat a bit lower.
- Reduce reliance on your car. Walk or take the bus when possible. Learn how to fix and maintain your bike so you can use it more often.
- Meal prep to limit your temptation to eat out.
- Skip soda and juice in favor of water. Supplement with coffee made at home if you are in desperate need of caffeine.
Automate the Saving Process
Many people are perfectly capable of saving for an emergency fund but simply forget or otherwise neglect to follow through. This problem is best solved with a simple and accessible hack: automation. Most banks offer solutions such as automated transfers, which shift money from your checking to your savings account on a regular basis.
Drawing on the power of “setting and forgetting,” this strategy allows you to save when you’re not even consciously aware of it. What’s more, by removing money from your checking account, you’ll limit your ability to mindlessly spend beyond your means. Be conscious of the potential for overdrawing, however, and don’t plan to take out more than you can realistically handle in any given month.
Prepare for Unexpected and Sudden Costs
Ideally, you won’t need to dip into your emergency savings every time you incur unexpected expenses. This fund should be exclusively earmarked for true emergencies, rather than the occasional inconveniences that threaten to set you back. Develop a comprehensive plan to determine how these sudden costs will be handled and what, exactly, qualifies as an emergency. This should encompass insurance for all the essentials: your car, home apartment and of course, medical expenses.
Beyond this, minimize the extent to which you might suffer a sudden expense. Car repairs, for example, are a standard part of owning a vehicle and, outside of accidents, can often be avoided or at least anticipated if you work with a trusted maintenance provider. Likewise, taxes should also be built into your budget, even if they are not withheld from your paycheck.
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