A Step-by-Step Guide to Building an Emergency Fund

No matter your financial standing, you need an emergency fund to keep your family safe and secure. But if you’re starting with very little savings in the bank, managing to save up such a hefty amount can initially seem quite far-fetched.

The What and Why of an Emergency Fund

In the most basic sense, an emergency fund is a bank account that is set aside for the sole purpose of funding large and unforeseen expenses that tend to crop up in life. These include things like an emergency room visit, a major car repair bill, a home appliance replacement, or even extended unemployment.

As RISE explains, “Having an emergency fund is key to maintaining your financial stability in the event of an unforeseen challenge. It helps you weather the storm without having to turn to expensive loans that can be difficult to repay—like payday loans—or having to rely on friends and family for help.”

Every individual has their own definition of how much money needs to be in an emergency fund, but the general rule of thumb is somewhere between three and six months of household expenses. In other words, if your mandatory monthly expenses are $4,000, a fully-funded emergency fund would consist of $12,000 to $24,000 in cash.

5 Tips for Building Your Emergency Fund From Scratch 

As someone who doesn’t have much to your name, saving up $10,000 or more can seem impossible – but it’s not! With the following tips, you can gradually build up your emergency fund and find some solid financial footing. 

  1. Create a Detailed Budget 

You can’t do anything until you come up with a budget that outlines your monthly income and expenses. And you can’t afford to be laissez-faire about it. The budget needs to be specific and detailed in order to work.

The best way to start a budget is to use an online budgeting tool that walks you through the process in a step-by-step fashion. Solutions like YNAB, Mint, or Acorns are a good place to start. 

  1. Cut Superfluous Expenses 

Once you actually have your budget on the screen in front of you, it’ll become apparent where you’re bleeding money. For many households, cash drains are found with online shopping, eating out, overpaying for cable, and entertainment. By using some self-discipline and eliminating these unnecessary expenses from your budget, you can find extra cash to begin contributing to an emergency fund. 

  1. Set a Goal 

Every emergency fund starts with a good goal. You need to think about how much money you want to have in your fund and then work backward to figure out how you can get there.

Let’s say, for example, that you want to have $10,000 in an emergency fund and you have an extra $475 in your budget each month. Dividing $10,000 by $475 gives you 21 months. In other words, it’s going to take you close to two years to get fully funded. Using this as your benchmark, you should do everything within your power to meet (or exceed) this goal. 

  1. Don’t Tempt Yourself 

You know yourself better than anyone else. If you’re the type of person who will have a hard time keeping your hands off of your emergency fund, it’s important that you limit your access to it. This might look like shredding the debit card associated with the account and transferring the money into another account when it’s actually needed. 

  1. Refill After Using 

An emergency fund does serve a functional purpose, however. When the time comes that you do need to use a portion of the money for a valid emergency, you should immediately make room in the next month’s budget to refill the portion of the fund you used on the expense. 

Save Up for a Rainy Day 

Life is anything but predictable. If you’re living paycheck to paycheck and hoping that everything will just work out, you’ll eventually be disappointed. By building up an emergency fund, you can give yourself an insurance policy against disasters and emergencies. It won’t guarantee smooth sailing, but it will give you peace of mind that you’re going to be okay.

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November 1, 2018 A Step-by-Step Guide to Building an Emergency Fund