A recent study by Bankrate.comhttps://www.bankrate.com/banking/savings/financial-security-january-2022/ found that less than half of Americans have enough savings to cover a $1000 emergency.
That’s a scary thought, especially when you consider the fact that life is full of unexpected emergencies – from car repairs to medical bills.
An emergency fund can help you cover those costs without having to go into debt.
But many people don’t have one because they either don’t know how to make one or they think it’s too difficult.
This post will explain what an emergency fund is and why you need one. You’ll also learn how to easily create your own emergency fund, even if you don’t have much money saved up already.
What is an emergency fund, and why do you need one?
An emergency fund is a savings account that you set aside for unexpected expenses.
It’s there to help you cover costs in the event of an emergency, like a job loss or unexpected medical bill.
Some experts recommend saving enough money to cover 3-6 months’ worth of expenses, while others suggest saving $1000 as a starting point.
The key is to figure out what amount makes you feel comfortable and then start saving up.
Work to gradually build your emergency fund so you have a safety net in case the unthinkable happens.
How to easily create your own emergency fund
If you don’t have any emergency savings yet, don’t worry – here are a few easy steps to get you started.
Step 1: Decide how much money you want to save
As mentioned before, most experts recommend saving 3-6 months’ worth of expenses as a rule of thumb.
But that can be an intimidating idea depending on where you’re starting from.
Consider starting small and slowly building up your emergency savings at a rate that feels comfortable to you.
Aim to save at least $1000 as quickly as possible, then continue to increase your savings over time.
The goal should be to eventually build your emergency savings to six months worth of living expenses or more.
But don’t let the difficulty of saving for a long-term goal dissuade you from getting started.
Step 2: Figure out where you’re going to keep your emergency fund
Where you keep your emergency funds will depend on how much money you have saved up.
For smaller amounts, a regular savings account at your bank or credit union is fine.
But if you have a larger emergency fund, you might want to consider investing it in a high-yield savings account to earn some interest on your money.
If you’re worried about accidentally spending out of your emergency fund, make sure to keep it separate from your everyday checking and spending accounts.
This could mean simply creating a separate savings account or, for even more security, using an entirely different bank account to house your emergency savings.
Step 3: Automate your savings
Once you know how much you want to save and where you’re going to keep it, set up automatic transfers from your checking account to your savings account.
That way, you’ll never even see the money, and you’ll be less tempted to spend it.
You can typically do this through your bank’s online portal or mobile app.
If you get paid bi-weekly, you could set up an automatic transfer for every payday.
Or, if you get paid monthly, you could do a transfer on the same day each month.
The key is to find a schedule that works for you and then stick to it.
Step 4: Start small and increase your savings over time
If you’re just starting out, don’t try to save too much too quickly.
Instead, start with a smaller amount like $20-50 per week (or $100-200 per month).
Once you’ve been automatically transferring that amount for a few months, you can start to increase it slightly.
The key is to find a savings plan that’s realistic for your budget and stick to it.
Step 5: Make it a priority
Even if you can only afford to save $20 a week, make it a priority to put money into your emergency fund.
You never know when you might need it, so it’s important to start building it as soon as possible. That way you have at least some money available just in case.
Saving six months of expenses can seem daunting, but it’s important to remember that a small amount can make a big difference.
Even if your emergency savings isn’t enough to cover your expenses, every little bit of debt you can avoid will be helpful in the long run.
Step 6: Set a goal and track your progress
It can be helpful to set a savings goal for your emergency funds, so you have something to work towards.
As you start to build up your savings, keep track of your progress so you can see how far you’ve come.
This will help keep you motivated to continue saving.
Tips for building up your emergency fund quickly
If you want to build up your emergency fund quickly, there are a few things you can do:
Cut back on expenses
Take a look at your budget and see where you can cut back on expenses. This will free up money that you can put towards your emergency fund.
Get a side hustle
A great way to make extra money is to get a side hustle. There are lots of ways to make money on the side, from pet sitting to starting a small business.
Sell unwanted items
Do a quick declutter of your home and sell any unwanted items. You can use the money you make to add to your emergency fund.
Ask for help
If you’re struggling to save up, don’t be afraid to ask for help.
Financial coaching can help you gain confidence with your money and create a plan to get on track and reach your financial goals.
What to do if you experience an unexpected emergency
If you have an unexpected emergency, the first thing you should do is try to tap into other resources before dipping into your emergency fund.
For example, if you have a medical emergency, you may be able to use your health insurance or Medicaid to cover the costs.
If you experience a job loss, you may be able to get unemployment benefits.
If you have to make a car repair, you may be able to use your warranty or insurance.
Once you’ve exhausted all other resources, then you can start using your emergency fund.
Remember, the goal is to only use the money in your emergency fund for true emergencies. This means only using it for unexpected expenses that are absolutely essential.
If you do have to dip into your emergency fund, make sure to replenish it as soon as possible.
Building an emergency fund is a crucial part of financial planning.
No matter how you choose to build up your emergency fund, the important thing is that you start today.
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