People often go through unexpected life events that can put a significant dent in their finances. Fortunately, you can protect yourself by setting aside money specifically for these types of situations.
This kind of savings is called an emergency fund. You can use it for unplanned but crucial expenses that aren’t part of your monthly bills and payments. Some common uses for emergency funds include:
- Sudden hospitalizations
- Car accident repairs
- House repairs
- A new baby
- Job loss
But how do you grow emergency funds in the first place? Take a look at this guide to get you going with your starter emergency fund.
How Much Should You Have in Your Starter Emergency Fund?
While there is no set amount of money to keep in your emergency fund, the rule of thumb is to save around three to six months’ worth of expenses. Of course, you can always save up to a year’s worth. To start, try reaching a milestone of $1,000, then continue building from there.
There are a few factors to consider when deciding on the amount to save, such as:
- Health: A relatively healthy person won’t need to worry much about medical emergencies. But if you’re prone to accidents or illnesses, then you’ll need to save up for medical treatments.
- Location: Where you live also affects how much you spend on utilities, food, transportation, etc.
- Job Security: Can you easily find a new job if you lose yours right now? If you don’t have a steady income, you might need more savings to help you during lean months.
- Relationship Status: If you and your spouse/partner are both working, you could afford to save less since it’s not very likely that you’ll both lose jobs at the same time,
- Family: Do you have any family members that can financially support you temporarily? Additionally, if you have kids, you need to think about their expenses too.
In any case, your emergency fund should ideally be big enough to cover your expenses for a certain period while you search for a new job, recover the money lost, and so forth.
How to Set Up Your Starter Emergency Fund
1. Assess Your Budget
The first thing to do is review how much money you’re working with each month. Consider how much you’re earning versus what’s left of your income after you’ve finished setting aside cash for monthly expenses. This will help you determine the amount you can contribute to your emergency fund each month.
2. Set and Plan Your Savings Goals
Once you’ve figured out how much extra money is left each month, you need to determine how many months’ worth of expenses you want to save and what your timetable is. Be sure not to forget to consider the factors mentioned in the previous section.
Let’s say you have $600 leftover each month and want to save for six months of expenses within three years. If you spend around $1,200 monthly, you’d have to save at least $7,200. That means you should save $200 every month to achieve your goal.
You could also base your contributions on a percentage of your income. The general rule is to give around 15 percent each month.
3. Put the Funds in a Safe Place
While you could do the old-fashioned piggy bank route, you might want to consider creating a dedicated bank account for your emergency fund. Since it’s not mixed in with your main account, you won’t always have to keep computing how much you still need to save.
You could also have your employer set up automatic deposits so that a certain amount goes straight to the account. Keeping it separate also helps you resist the temptation of unnecessarily withdrawing any cash from it.
Tips for Reducing Expenses and Increasing Your Emergency Fund
Want to contribute more money to your starter emergency fund? You can increase your savings by cutting back on expenses. For example, you could:
- Avoid non-essential expenses, like dining out or shopping sprees
- Cancel subscriptions that you barely use (ex. if you use Netflix more than HBO Max, ditch the latter)
- Turn off and unplug idling appliances to reduce your electricity bill
- Do chores that you normally pay someone else to do (ex. mowing the lawn)
- Skip the gym membership and work out at home
Doing these small things can help provide you with extra cash to put into your emergency savings account.
Why Is Emergency Savings Important?
Without emergency savings, you’ll have to use money that’s already been budgeted for your other bills to pay for any emergencies that come up. This leaves you with insufficient funds for regular expenses. You will then have to find other ways to finance them, such as getting a second job or selling your belongings.
You also won’t have to keep relying on credit to pay for everything. While loans can definitely save you in a pinch, you need to be careful not to let your debts pile up.
Though it can be a struggle to save up for your starter emergency fund, any amount can still go a long way in keeping your finances afloat during difficult times.