You probably realize you need an emergency fund, but it’s hard to know exactly how to start one.
Here’s how to start your first emergency fund. We’ll give you an idea of how much to save and how you can reach that goal more quickly.
Remember — the most important step is simply getting started. After all, some progress is always better than none.
Why Do I Need An Emergency Fund?
A surprising number of Americans — roughly 60 percent — don’t have enough funds saved to cover a $1,000 emergency.
That means most of us would have to go into debt to pay for something as simple — and common — as a leaky roof repair or a new car bumper. That’s not to mention the sky-high costs of emergency health care.
Nobody likes to think these things will happen, but there’s no way to predict when you’ll be faced with unforeseen expenses.
When disaster strikes, emergency funds can keep you from going deep into debt.
Shouldn’t I Pay Off My Debts First?
A lot of folks say it’s better to pay off your debts before saving for an emergency fund. However, that defeats the purpose.
Since emergency funds exist to keep you from going deeper into debt, it’s important that you have at least something — even if it’s just $1,000 — saved before you work on your credit card debt.
This way, you won’t be adding even more debt to the pile.
How Much Should I Save?
Most experts recommend building an emergency fund of roughly three to six months’ worth of expenses based on your typical monthly budget. That should be enough if you lose your job or withstand any other catastrophic event.
However, there’s no way to know how much an emergency will cost, so you should continue adding to your fund even after reaching your initial goals.
That said, savings accounts don’t offer as much growth as other types of investments, so keeping too much cash in savings can limit your earned interest.
You probably can’t save six months’ worth of money in one month, so start by contributing whatever you can take out of your budget. Even if you begin with just $50 per month, you’ll still be making progress and give yourself something to build on. From there, you can continue reviewing your budget each month and look for new ways to save money.
You might not be able to deposit several thousand dollars into savings if you’re dealing with other financial obligations. If you’re still in debt, set a goal to save roughly $1,000 for your emergency fund first. You can start making larger contributions after you pay off your debts.
Finding A Savings Account
You might think that all savings accounts are created equal, but some offer important perks that make them better investments than the alternative. Finding the perfect savings account can substantially increase your interest rate, so it’s important to do some research up front in order to identify the best deal.
Most savings accounts offer relatively low interest, so look for a high-yield account that will give you more money each year. High-yield savings accounts typically offer around two percent annual percentage yield, substantially more than is available with traditional savings accounts. They’re insured for up to $250,000 and offer the same liquidity associated with other savings accounts.
Tips For Building An Emergency Fund
Everyone’s approach to personal finance is different, but there are some strategies that can help you reach your savings goals quickly.
Remember that long-term success is all about developing the right habits, even if it takes time for those changes to pay off.
Don’t Waste It
An emergency fund provides additional financial stability, and it’s important to leave the money there for real emergencies. While it can be tempting to pull some cash out to cover immediate expenses, this is rarely a good decision — it’s tough to stop once you start withdrawing your savings.
It’s best to keep your emergency fund entirely separate from other accounts. Routine payments and purchases should never involve the money in your emergency fund. You might find this easier if you use one bank for your emergency fund and another for checking and other savings accounts.
Add Savings To Your Budget
Saving money can be a tough habit to get into, and it’s easier when you set a monthly savings goal and automatically transfer the money each month. This makes saving your first financial priority and ensures that you make a contribution every month.
You can always increase your savings goal, so start with a manageable target for the first few months. Meticulous monthly budgeting will help you find more ways to cut back on spending and grow your emergency fund. You should also consider contributing any extra money in your checking account at the end of the pay period.
Make Small Contributions
You should try to put at least some of each paycheck toward savings each month, but smaller contributions can also help you make progress. Rather than putting change back in your wallet, for example, keep coins and small bills separate and deposit them at the end of the month.
If you prefer to manage your money online, you can also use a savings app such as Acorns to set up automatic round-ups and other contributions on your purchases. These strategies allow you to save money without noticing the gap in your budget — small contributions add up surprisingly quickly.
Save Your Tax Refund
Most people spend their tax refund quickly, but you should think about using that money for financial security by contributing it to your emergency fund. You can set your refund to deposit directly into a savings account so you aren’t tempted to spend the money now.
If you’d rather get that money earlier, you can make changes to your W-4 form so that you have less cash withheld. This strategy allows you to accurately budget for taxes throughout the year rather than waiting for an unpredictable refund.
Earn Extra Money
The easiest way to save more is simply to make more, and you can add to your paycheck by finding a new source of passive income or working a part-time job. Sell old items, rent storage or lodging space and earn cash back and other rewards.
If you’re comfortable living on your base salary, you can contribute your secondary income directly to savings. While you’ll spend a little more time working, you’ll be able to save a lot more even if you don’t cut down on spending. The best option for you depends on your current budget and schedule.
Some people think of an emergency fund as something to focus on in the future, but unpredictable events can happen at any time. Most people without a fund end up taking on debts to pay for emergencies. Keep these tips in mind as you start building your emergency fund and improving your financial stability.
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