You’ll never know when bad luck will strike or how it will manifest. For example, you or a loved one might need immediate medical attention that your health insurance won’t fully cover. Or a housing bubble might force you to give up your house. Obviously, a global pandemic can also occur, resulting in your employer laying off workers, including you.
While thinking about those scenarios is counter to the common perception that you attract what you envision, it can’t be helped. As they say, bad things happen even to good people. Once those bad things knock on your door, it’s best to be prepared.
This is where an emergency fund comes in. You need sufficient savings to protect you from financial hardships. Ideally, you do not tap into this fund for any reason other than what it’s intended.
Here’s how to get started with your emergency fund.
1. Decide How Much You Need
Your financial circumstances factor into how much you can save for an emergency fund. There’s nothing wrong with starting small if that’s what’s practical in the meantime. For instance, you can save between $500 and $1000. This amount can go to emergency home or car repair. However, for more demanding emergency expenses, you’ll need way more.
A rule of thumb is to save at least six months’ worth of living expenses, covering rent or mortgage, grocery expenses, and utility bills, among other expenditures. It should be enough to help you get by if, for example, you lose your job. While looking for a new one, you don’t have to borrow and incur interest on your outstanding debt.
2. Decide Where To Save
A savings account with a high-interest rate is your best bet. It’s also crucial that this account is easy to access. Remember that you cannot predict emergencies. Should they happen, you want to be able to go to a nearby ATM or bank and withdraw the money you need without having to accomplish time-consuming paperwork.
Consider putting your savings into a high-yield savings account. Your money will earn interest, and access to your funds is pretty straightforward.
3. Set A Monthly Savings Goal
You want to save enough for your emergency fund without you having to scrimp daily like you’ve gone broke. Here, the key is balance and planning. You need to have an objective in mind, amount-wise.
Once you’ve set up a monthly goal, commit to it. You can divide the amount between your two paychecks for the month. If you want to be extra sure, you can deduct the entire amount from your first paycheck for the month, so it’s out of the way.
If you work freelance for multiple clients, you can directly funnel payouts from one client to your emergency fund while living off what you get from your other clients.
4. Stick To A Monthly Budget
When you set up a monthly savings goal, you must supplement the plan with a monthly budget. Otherwise, there’s a bigger chance that you’ll overspend and end up withdrawing what you’ve already deposited into your emergency savings account.
A monthly budget will put order to your expenses. To stick with it, you must be aware of “wants” and “needs.” The latter is stuff you can’t do without; the former are expenses you can probably let go of. It’s okay if you succumb to “wants” from time to time. Just make sure it does not become a habit and compromise your savings goal.
Download a budgeting app to keep the process simple. Must-try names include Zeta, Mint, and Goodbudget.
5. Find Supplementary Sources Of Savings
Whenever you purchase something with cash, you get loose change or bills. While it’s tempting to tell the grocery clerk to keep the change, it’s counterproductive to your goal of building an emergency fund. Instead, put every loose change or bill you get in a jar at home. Once that jar’s full, deposit the amount to your savings account.
Using your tax refund is another way to build your emergency fund. After all, you’ve probably forgotten about that money in the course of the fiscal year, and so it makes no difference if you don’t get to enjoy it now. The same rule can apply to unexpected earnings, such as unofficial bonuses from work.
6. Set Up An Automatic Transfer
You can ask your employer if they’re amenable to automatically depositing a portion of your earnings to your emergency savings account. Should they refuse to do it, you can set up your checking account in such a way that it directly deposits funds to your savings account. Doing this will prevent you from spending what’s meant for saving.
7. Keep Saving
If you commit to your monthly savings budget, you’ll hit your emergency fund goal in no time. When that happens, continue saving. The bigger your emergency fund, the better. Alternatively, once there’s enough there for other investment opportunities, you can begin diversifying your financial portfolio. Just make sure you don’t touch the emergency nest egg you’ve built.
8. Be Prepared
When we enjoy relative financial security in the present, sometimes we forget about the future. And that’s surely one of the worst mistakes you can commit in terms of your finances.
There’s no accounting for what life has in store for us. But we have control over how we do things now. And now’s the best time to jumpstart your emergency fund so you can grow it into a sufficient amount enough to sustain you.
They say that when the going gets tough, only the tough get going. But it’s also worth mentioning that regardless of how tough you are, if you lack the money to spend for pressing needs, you’re at risk of succumbing to financial hardship. Do not let that happen. With an emergency fund at your disposal, you’ll sleep better at night. Sure, peace of mind comes with a price. But it’s worth every penny.
Kimberly Tan is a financial advisor who loves to freelance writing about personal finance. She is very passionate about helping people in managing their finances and see them succeed in it. Reading books while drinking tea is her favorite thing to do in her free time.