Having an emergency fund for unexpected expenses is an important part of financial planning. Without it, you can quickly find yourself in a tough spot if you have to pay for something unexpected. Building an emergency fund can seem daunting, but it doesn’t have to be. With these strategies and tips shared in this post, you’ll be able to prepare for whatever the future may hold.
Unexpected expenses can come in all shapes and sizes, from medical bills to home repairs. According to the 2019 Consumer Financial Literacy Survey, only about four in ten Americans have enough saved to cover a $400 emergency. Knowing how to build an emergency fund for unexpected expenses is an important step toward financial security. Below, we’ll explore three tips to help you get started.
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Determine how much you need to save
When it comes to saving for unexpected expenses, the first step is to determine how much you need to save. Having an emergency fund allows you to cover any sudden costs that might arise, so it’s important to be prepared. Start by assessing your current financial situation and creating a budget. Look at your monthly income, expenses, and liabilities to get an idea of what kind of money you have available to save.
Once you’ve created a budget, it’s time to figure out how much you should be saving. As a general rule of thumb, aim to save three to six months’ worth of living expenses in your emergency fund. That way, you’ll have enough money saved up to cover your basic living expenses if you find yourself without a steady income. If you’re self-employed or work in a job with inconsistent income, consider saving up to nine months’ worth of living expenses in case of an emergency.
Finally, factor in any existing debt you may have. Consider setting aside an extra amount for any loan payments or credit card debt so that you can pay off the balance in full if needed.
Once you’ve assessed your finances and determined how much you should be saving, you can start building up your emergency fund.
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Automate your savings
One of the best ways to make sure you stick to your emergency fund savings plan is to automate it. This means setting up a regular transfer from your checking account to your emergency fund savings account. Automation saves you the trouble of having to remember to move money every month and makes sure that your emergency fund keeps growing.
You can set up an automatic transfer with your bank or credit union. Look for options that allow you to set up recurring transfers on a regular basis (weekly, biweekly, or monthly). The amount you decide to transfer can vary depending on your budget and how much you need to save to reach your goal.
Automating your emergency fund savings helps take the guesswork out of the process and allows you to relax knowing that your emergency fund is taking care of itself. It’s important to remember that this process will take time, so be sure to check in periodically to make sure that you’re on track.
Use a specific savings account
Setting up a separate savings account for emergencies will help you better plan for and save for sudden costs. Having an account that is separate from your regular spending money will also make it easier to track your emergency fund balance. According to Bankrate, nearly three in 10 Americans have no emergency savings at all. To avoid becoming part of this statistic, it is important to designate a specific account just for your emergency funds.
When choosing a savings account, it’s best to look for accounts with high interest rates and no monthly fees. Online banks may have higher interest rates than traditional banks, so it’s good to look at all of your options. For example, online bank Ally offers a 1.8% annual percentage yield (APY) on their high-yield savings account. Setting up an online savings account with a high interest rate can help your money grow faster.
Once you’ve set up the account, set up automatic deposits to make sure you’re always putting money away for an emergency. Automation can be a powerful tool to help you reach your financial goals. Having a designated savings account for your emergency funds will help you stay organized and make it easier for you to save for those unexpected expenses.