Starting an Emergency Fund

February 25, 2016
Eileen L., Financial Expert

Are you prepared for a financial emergency? A recent survey showed that 40% of respondents has an unexpected expense in 2015. If you own a car or house or have children or pets, you know you can’t plan for every expense. Keep reading for tips on building your own emergency fund.

How Much Money Do I Need to Have Saved?
There are tons of different opinions on how much money you should have in your emergency fund. Many sources recommend three months of living expenses. But some recommend up to a year of expenses or a year of salary. That’s a lot of money. With all savings, something is better than nothing. Start out with a goal of just one month of living expenses. Then, when you’ve built that up, evaluate your life and decide how much will make you feel comfortable. If you have a lot of job security or have other savings, maybe three months of expenses is enough. If you think you’ll feel most secure with one full year of your salary saved up, go for it! It’s your money: do what makes you feel best.

How Should I Build My Emergency Fund?
If you’ve read any of the other posts on saving, you know how much I love to automate my savings. I’d suggest automating your emergency fund savings, too. For me, I don’t want to even think about my emergency fund until I need it. So, I set up automatic transfers every payday into my savings account. Automatic transfers are my favorite way to make saving easy. Once the money is out of my checking account, I don’t even think about it. Instead, I just see my emergency fund growing.

Because an emergency fund needs to be accessible, it doesn’t make sense to invest it in something like your IRA. Even though that might get you better return on your funds, it’s hard to access when you need it. Instead, look for a high yield savings account like an Insured Money Management Account. It’s easy to withdraw funds, but you still are earning higher dividends.

What Is an Emergency?
When you start saving money, it’s easy to want to spend it. Make sure you’re only taking money out of your fund for a real emergency. What do you consider an emergency, though? It’ll be different for everyone. When you’re making a savings plan to build up your emergency fund, make a list of what you consider an emergency. Losing your job is definitely a reason to dip into your emergency fund. Or what about having to take your pet to the vet unexpectedly? Maybe car repairs are an emergency for you. Make a list, and then commit to sticking to it.

Be flexible! Even if you’ve decided that new luggage will never be an emergency, you might need to buy a new suit on short notice for an interview. Is that an emergency to you? The list you make will put you in the right mindset to recognize your emergencies.

Even though it’s easier to save for defined expenses (like a vacation or a house) than for undefined expenses (like car repairs), an emergency fund is important at every stage of your life. When you have an emergency fund, you know you can handle whatever financial hurdles might be in your way. Saving a little every month to have less stress in an emergency? That’s worth it to me!

 

Tags: Savings, Budgeting, Money Management