You are now leaving our website and entering a third-party website over which we have no control.
Emergency savings: You never know when you might need it
Key takeaways
-
Set a realistic savings target and create a monthly budget to determine how much you can consistently contribute to an emergency fund
-
Automate and separate your emergency savings. Open a dedicated savings account and set up automatic transfers to prevent spending emergency funds on non-essentials
-
Start small and use windfalls strategically. Begin with whatever amount you can afford, even if modest, and boost your emergency fund with bonuses, tax refunds, or other unexpected income to reach your goal faster
Unexpected expenses are a painful fact of life. They can be less painful, however, when you have built an emergency fund.
An emergency fund is a financial safety net—funds that you've set aside in an easily accessible place to only use for unplanned expenses and financial emergencies. You can’t predict when a medical bill, major home repair, or loss of income will hit. You can, however, learn how to build an emergency savings account to help you deal with those things.
Let’s look at the steps for building up an emergency savings account—what’s sometimes called a rainy day fund—as well as some emergency fund tips:
Assess your finances and set up a savings goal
If you don’t have a monthly budget, this might be a good time to start. Determine how much you spend each month for essentials—housing, utilities, food, transportation. See how much is left for discretionary items. Now determine how much of that could be going into savings each month.
There are a few issues that can complicate things. If you have high-interest debt to pay off, you’ll need to balance conflicting goals. You want to pay that off as quickly as possible to reduce the total amount of money you’ll pay in interest. On the other hand, you also want to build up your emergency fund. In this case, you might need to make smaller deposits into your emergency fund until you get the debt paid off.
If you already put money into savings, that’s a great start. But you need to ask yourself: is it defined as an emergency fund and treated that way? In other words, can you promise yourself not to touch it until an emergency? The bottom line for this step is to set up a dedicated emergency fund and set a goal for it.
Open a separate savings account
Once you come up with a plan, it’s time to open a savings account, or rename an existing one, as your emergency fund. Having a separate savings account for this purpose helps you:
- Separate that cash reserve from daily spending
- Organize your finances
- Track progress toward your goals
Some banks allow you to open multiple savings accounts. If you can afford it, you could make regular deposits into multiple accounts labelled for different purposes: emergency fund, car repair fund, vacation fund, mortgage deposit fund.
For people living paycheck to paycheck, it can be hard to put money into an emergency fund, but even a little bit will eventually add up. And someone in that position could really need an emergency fund.
How much should I save for emergencies?
The specific amount of money you place in your emergency savings account depends on your situation, including your age, your total income, your expenses, and what kind of job you have.
The standard emergency fund goal is to save 3 to 6 months of your current expenses. This time frame is the go-to because it means that if you were unable to bring in any money for that amount of time (like from losing your job), your everyday expenses would still be covered while you found a new job.
Some experts recommend 6 to 12 months if you have a career in a specialized field where it might be difficult to find a new position.
You also might need a bigger emergency fund if you’re self-employed or are supporting children or parents. If you have low expenses or no dependents, you might not need a big emergency fund.
Automate your savings
If you get paid through direct deposit, it could enable you to develop an automatic savings plan by seeing if your employer allows direct deposits into multiple accounts like checking and savings. If they don't, check with your bank to see if they’ll automatically shift money from a checking account to a savings account on a regular basis.
Saving automatically can prevent you from spending the money that should go into your emergency fund. It also gets that money into the emergency savings account as quickly as possible to maximize the interest you earn.
It’s also important to find the right type of savings account. A high-yield savings account might be a good choice because it could pay more interest than a regular savings account and help your emergency fund grow.
Start small and build over time
People who can barely keep their heads above water may wonder how to how to start an emergency fund without any money.
It’s important to emphasize that any amount you can put into savings will help you build a cushion against unexpected trouble. Settle on a small percentage of income to save or pick a figure, like $20 a week. It will add up over time, along with compounded interest, to help create a habit of saving money.
Cutting unnecessary expenses
One of the benefits of assessing your financial circumstances and creating a budget is that it can help you get a clear picture of where your money goes. Setting up goals and defining a purposeful financial life can not only help you determine unnecessary expenses but also make you focus on ways to cut them out.
Eventually, when you hit your emergency fund goal, you can start putting those savings towards some other purpose. It could be a college fund for your children or a downpayment for a house. Cutting unnecessary expenses over the long haul could give you many more options for major, necessary expenses.
Using windfalls to boost savings
When you get into a savings mindset, you might find that you enjoy seeking out new opportunities to reach your goals faster. For example, when money comes your way unexpectedly, you can put it into your emergency fund. If you're wondering how to use a bonus, think of it as "found" money and stash away as much as possible into that rainy day fund. And if you put a tax refund in your emergency fund, it could help you hit your goals ahead of schedule.
As many of us have heard before, “prepare for the worst and hope for the best.” An emergency fund does exactly that. You might find creating an emergency stash kind of daunting at first, but in the end, having that extra cushion can bring some welcome peace of mind.