You have to stop living without an emergency fund. An emergency fund is an essential safety net that can help you handle just about any urgent, unplanned expense that falls into your lap, all without disrupting your usual expenses.
Withdrawing from this fund shouldn’t have any impact on your ability to cover your rent/mortgage, pay your utility bills, fill up your car or stock your refrigerator with groceries.
So, how do you build an emergency fund? Read this step-by-step guide to get started.
Step 1: Follow a Budget
Are you following a personal budget? If the answer to that is “no,” then you’ll need to change that right away. Download one of the most popular budgeting apps on your smartphone or computer. Use your preferred app to build a monthly budget, dividing up your income to cover specific expense categories.
Step 2: Calculate Your Savings
You will need to add a new category to your personal budget: emergency savings. Calculate how much you can afford to put into this specific category every single month. If you think the amount isn’t enough, adjust some of your other expense categories so that you can put more money into your emergency savings.
Step 3: Open a Savings Account
Emergency funds shouldn’t be stored as cash somewhere in your house. Paper bills are easier to spend without thinking. You might be tempted to pull a few bills out of the jar sitting on top of your refrigerator whenever you want to order takeout or go out with some friends. Those bills can quickly dwindle and leave you with a smaller safety net for emergencies.
So, where should you keep your emergency fund? In a savings account. This savings account should be solely for your emergency fund. If you already have a savings account for other goals, like college savings, do not add your emergency savings to it. Open a new one.
Why should you use a savings account?
- It will keep your savings easily accessible, so you can make a withdrawal right after you encounter an emergency expense.
- It comes with an interest rate, which will help your balance grow. While the interest rates with savings accounts usually don’t go above 5%, the compounding interest can still provide small but useful boosts to balances.
- It will keep your emergency fund out of sight and out of mind. This will reduce the temptation of making unnecessary withdrawals and shrinking your safety net.
Step 4: Add Your First Contribution
Once you’ve opened your savings account, you can start contributing to it. Add the budgeted amount to your emergency fund.
Step 5: Automate Your Future Contributions
Now, you’ll want to automate future contributions to your emergency fund. Doing this will guarantee that you never lag on your contributions. You’ll stick to the commitment so that your emergency fund never stays stagnant. It’s always growing.
Through your online bank account or your bank’s mobile app, you can set up transfers between your checking account and your savings account. The transfers should trigger every month.
When Your Emergency Fund Is New
When you’re first building your emergency fund, it won’t be a very effective safety net. You might not even have $100 sitting inside of it. It will likely take several months of consistent contributions before you can rely on the contents of your fund for emergencies.
If you encounter an emergency expense in these early stages, don’t panic. There are still ways that you can pay off the expense. You could go to a website like CreditFresh and apply for a personal online loan. If you get approved for a personal online loan, you can use borrowed funds to resolve your emergency in a short amount of time. Once that expense is taken care of, you can repay the personal loan through a basic billing cycle. Over time, you can tackle the repayments and put the stressful experience behind you.
You might need an emergency fund sooner than later. So, it’s time to start building one! When disaster strikes, you’ll be thankful you have the savings to draw from.
