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*Editor’s Note: This content is for informational purposes only – it should not be treated as legal, tax, investment, or financial advice. Please consult with your tax or financial advisor for advice specific to your situation.
Surprise expenses can be a tremendous source of financial stress. Things like unexpected car trouble, home repairs, and medical emergencies can burden even the most balanced of budgets. But an emergency fund can provide peace of mind and equip you to handle unforeseen costs without having to rely on high-interest credit cards, personal loans, or other risky financial options.
How to start an emergency fund
You might have heard that you should keep about two months salary in your emergency savings, but most experts agree it’s best to build a financial buffer that can cover your household expenses for three to six months. Of course, it does take some effort to accumulate this much funding.
Here are some tips to get you started:
Take a close look at your budget.
Understanding exactly where your money goes will help you identify opportunities to save. There are a number of budgeting apps that make it easy to learn how to set up a budget. These typically provide a monthly budget template, which can guide you through calculating your income and expenses, categorizing your spending, finding opportunities to reduce your expenses, and improving your overall financial health.
Set a clearly defined goal.
Once you’ve taken the time to calculate your expenses, you know exactly how much money you need each month to cover monthly costs like housing, food, utilities, and other necessities. Simply multiply that sum by six, and you have the amount necessary to get by for half a year should you find yourself facing long-term struggles. Setting aside that much money might seem daunting, but find some comfort in knowing that it takes most households a substantial amount of time to reach this goal.
Open a dedicated savings account.
Saving money in a separate bank account keeps it out of sight and out of mind, as the saying goes. When funds are not easily available to spend, you’re less likely to use them on non-necessities. Plus, having a separate account for your emergency fund also makes it easy to see at a glance how much you have — and how much you still need to save to meet your goals. It’s the ultimate preparedness tool.
Automate, automate, automate.
Many people use direct deposit to route payroll into their checking account, which eliminates the manual process of taking physical checks to the bank. If you’re working to build an emergency fund, it might be helpful to set up a direct deposit to divert a specific amount to your emergency fund while sending the rest to your checking account. Automation can greatly simplify saving, making it that much easier to achieve your savings goals.
Weigh all options for absorbing financial blows.
Your employer might offer additional resources that will help stave off financial setbacks. A Health Savings Account (HSA) or Flex Spending Account (FSA), for example, allow you to set aside tax-free funds for healthcare-related expenses.
Increase your savings over time.
As you feel more confident in your ability to save — and as you eliminate costs such as car payments or student loans — it might make sense to increase monthly contributions to your emergency fund by 1% or some other manageable increment. These small increases won’t feel like an extraordinary expense, but they will help you save money even faster.
Plan to save at least part of any surprise income.
Maybe you win the lottery. Or maybe you get an unexpected influx of cash by way of a bonus at work, tax refund, inheritance, or gift. These unexpected windfalls are fantastic opportunities to contribute to your emergency fund.
The most important part of setting up an emergency fund? Never stop saving. Even after you’ve set aside six months worth of expenses, it’s a good idea to continue regular contributions to your emergency fund. If you or your loved ones are unemployed for more than a year or hospitalized for an extended period, an emergency fund will go a long way toward staving off stress due to financial problems.
