You know you need an emergency fund. You’ve been told how important having emergency savings is. But how exactly do you do this? How do you save for emergencies when everything else is so important too?
I’ve written this ultimate guide to emergency funds to help you get your emergency savings started in a few practical steps. You don’t have to keep putting this off any longer, and the sooner you start saving, the sooner you’ll be prepared for whatever life throws your way!
Step 1: Decide on Your Amount
There are a few different factors you should consider when deciding on how much you should have in your emergency fund. How big is your family? How many different incomes do you have coming in?
Popular advice is to start with $1,000 and build from there. I think $1,000 is a solid number to start with, as that can usually cover an insurance deductible or a minor car repair to keep your transportation going.
Ultimately, I think you should shoot for somewhere between 3 and 6 months of expenses in your emergency fund. That’s a big range, so that’s where the answers to the questions you asked yourself earlier come into play. If your family is a single-income household with four kids, definitely shoot for a higher amount. If your income-earner were to be hurt in an accident or unable to work for a while, you need a bigger safety net to fall back on.
On the other hand, if both you and your spouse work, have side jobs, and only have one child, you would probably feel pretty comfortable with a three month cushion in the bank.
Decide on a number that works for your family situation.
Step 2: Decide on Your Time Frame
Obviously, saving up six months of expenses is a huge goal. It’s going to take some time.
For this step, I would make this a two-part goal. When do you want to have your “mini” savings account done by, and when do you want to have your big goal done?
It’s important to have something in savings even if you can’t fully fund your savings account very fast. If it takes you a full year to get three months saved up, what happens if an emergency strikes while you’re still saving?
Decide when you want to have your savings account done and then decide to get at least a starter fund going in the very near future. One or two months to have $500 to $1,000 in savings is a good goal to shoot for.
Step 3: Create a Line in Your Budget
The only way to hit a big goal is taking small, consistent steps until you finally get there. Of course there are exceptions like inheriting a big sum of money, but those scenarios are few and far between.
It’s time to visit your budget.
Make your emergency savings fund a priority, maybe even priority #1 right now. Add it to your budget just like any other bill you have to pay. Look at the time frame you want to have the account funded by, and see how much money each month that’s going to take. Best case scenario, you’ll be able to add it into your budget without moving too much around. Then you just have to plug away each month until you’re there!
Most likely though, you’ll have to do some serious adjusting to make this goal work. You may have to take on extra work to bring in more money, or lower some of your other expenses to send more money to your emergency fund. Work with your budget until it works for you!
Step 4: Remember Why This is Important to You
For some people, watching their savings account grow every month is plenty motivation to keep going. For others (especially if you consider yourself a “spender”) it’s going to be really hard some months to put that money back instead of spending it on other fun stuff.
Decide why exactly saving up an emergency fund is important to you, and write it down to revisit when you’re losing motivation. What specifically gets you fired up the most about having an emergency fund set aside?
It’s not enough to just have money in the bank. Do you want the peace of mind that if you can’t work for two months you’re covered financially, stress free? That if your kid has to go the ER in the middle of the night, the medical bills aren’t a catastrophe?
Why is it important to you to have an emergency fund? Write it down and stick it in your budget folder to come back to when you need that extra “push.”
Other Tips and Frequently Asked Questions About Your Emergency Fund
Where Should I Keep My Emergency Fund?
Most importantly, do not keep the extra funds sitting in your main checking account. Little by little, it’s very easy to dwindle those “extra funds” away when they’re connected to your debit card.
You want your emergency fund to be accessible in an emergency (duh) but you don’t want it to be too accessible so that it’s easy to spend. The easiest place to keep your emergency fund would be a separate savings account at your bank. You can transfer the money to your checking account if you need the money in a pinch, but it’s still safely tucked away.
Another great option is an online bank. They usually have better interest rates than your local bank, and you can usually have the money transferred to your regular account in a day or two. I’ve personally used Ally and loved it.
How do I Know When to Use My Emergency Fund?
It can be a little tricky to know what’s a true emergency and what’s not. Here are some things to NOT use your emergency fund for:
- Christmas gifts
- A vehicle purchase
- School tuition and fees
Those are all things you can plan for and save up for separately. A true emergency pops up unexpectedly, like:
- A trip to the ER
- A storm that damages your home
- A job loss
- The car breaking down
Those are things I would be comfortable spending from my emergency fund on. While yes, you could be a super saver and have fund set aside for “house”, “car”, etc. I don’t think you’re cheating yourself if you need to use your emergency fund on a situation like that.
The peace of mind that an emergency savings account provides is priceless. Follow the steps and get your emergency fund started today!
Have you ever had to use an emergency fund? Comment below, and click here to pin this for later!