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A Step-By-Step Guide to Building Your Emergency Fund

by Kimberly Fischer
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There’s no time like the present to remind us that the future is uncertain. With the coronavirus pandemic sweeping the globe, millions of workers affected by layoffs and unemployment, and economies declining at scale, it’s clear that having an emergency fund is more important than ever. And while it’s challenging to build an emergency fund in the middle of a crisis, there are a few ways you can start preparing for unexpected future events.

Do I Need an Emergency Fund?

An emergency fund is your safety net. It’s what will help you keep your head above water when faced with a worst-case scenario. Whether it’s a car accident, vet bills, a freak weather event, an illness, or the loss of a job, it pays to be prepared. Taking steps now can help prevent financial fallout down the road.

You can’t predict the future, but you can expect the unexpected, and minimize your risks. 

You Can Take That to the Bank

Saving money isn’t easy, even at the best of times. Money management is stressful, especially considering that unexpected costs can arise with little or no warning.

The consensus states that a viable emergency fund should allow you to cover around three to six months’ worth of expenses without any additional income. Financial consultant Suze Orman says financial stability is being able to cover eight months, while others say 12 months is preferable. 

However, when polled, 28 percent of American adults, said that they didn’t have enough savings to cover even one month’s worth of expenses, let alone three to six. An additional 25 percent said their savings could hold them for less than three months. 

Understandably, saving money is becoming more difficult these days. Many adults in the US are living paycheck to paycheck, making it difficult to cover the necessary expenses, let alone build up a savings account. But when it comes to an emergency fund, every little bit helps.

With some forethought, planning, and a budget, you can avoid financial disaster. Even if you’re building your emergency fund from zero, it’s still possible to turn your investment into a nest egg. Here are a few tips for getting started.

1.     Define The Rules

When you start saving for an emergency fund, lay out the ground rules. If you have a partner, work together to establish what the money can be used for, and when. An emergency fund isn’t the same as a savings account. It’s different from, say, setting aside money to buy a fancy car or a new television. It’s for true emergencies. 

It’s up to you and your partner to decide what qualifies as a ‘true emergency.’ Financial advisor Dave Ramsey has a great list of three factors that can help you make up your mind about a potential emergency.

When faced with an unanticipated expense, ask yourself:

  • Is it unexpected? 
  • Is it necessary?
  • Is it urgent?

If this all seems overwhelming, don’t worry. The whole point of saving now is that you don’t panic when an emergency does arise. An emergency fund isn’t intended to make you anxious, it’s to give you peace of mind.

2.     Set Your Budget

The hardest part of saving money is setting your budget and sticking to it. The more you want to save, the tighter your budget will have to be. Living sparsely so you can save for an emergency fund isn’t very fun. But when you encounter an unexpected financial burden, you’ll be thankful you did it.

Make a list of your monthly income and all your necessary expenses. This should include rent, utilities, phone and internet, auto payments, groceries, and any other household essentials. If you’re financially able, consider setting aside a small amount for discretionary purchases, like an occasional meal out or a new outfit for your kids.

3.     Make Contributions

Based on your budget, decide how much you want to contribute monthly to your emergency fund. Plan to contribute a set amount each month. You may even want to set up an automatic deposit, so you’re routinely paying into your fund first without overthinking it. 

When you’re first starting, you may want to take the remainder of your income left after your necessary monthly expenses and add it to your emergency fund, even if it exceeds your set contribution amount. This will give you a small but firm amount to work with if something comes up in the short term. Once you have that nest egg established, you can go back to contributing the set amount you initially decided on, knowing that you have a safety net in place.

4.     Start Small

The objective may seem overwhelming at first, but don’t let it deter you. The key to not getting burnt out when saving is to turn your goal into small, achievable chunks. Be realistic. Six months’ worth of savings is daunting at best and seemingly impossible at worst. So don’t start with the six-month goal in mind. 

Start small, as small as is realistic for your financial situation. Maybe that’s saving $500, or even $250 at first. When you meet your initial goal, set it higher, and then higher again. If your income increases, increase your contribution amount accordingly. The more you can put away, the sooner you’ll be able to achieve your emergency fund goal.

5.     Celebrate Success and Put Your Fund to Good Use

As you save, that number that at first seemed impossible will slowly come into focus. These incremental gains can also bolster your feelings of success and motivate you to keep going. You’ve worked hard to budget, save, and put money away, and you should be proud of yourself.

And when the time comes, don’t be afraid to spend your emergency fund. Ask yourself, is it unexpected? Is it necessary? Is it urgent? If the answer to these questions is yes, then go ahead. This is precisely what you’ve been saving for, and you can always rebuild your fund for next time. 

In conclusion, saving is a lifelong journey. It may come slowly at first, but if you work hard, budget carefully, and stick to your plan, you can prepare yourself for whatever the future may bring.

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