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Emergency Savings Fund: Quickstart Guide

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Planning is always a wise decision because there’s no reliable way to predict the future regarding emergencies. Ensel Murphy wasn’t joking when he developed Murphy’s law, which states that anything that can go wrong will go wrong. Of course, everything doesn’t always go wrong, but the Universe runs on enough chaos to make Murphy’s Law a valid warning.

If you’re concerned about the uncertainty that exists in today’s environment, you’re not alone. Surely, there’s something you can do to protect yourself and your family if the unexpected occurs.

Building an emergency savings fund can create a safety net for yourself and your loved ones. Read on to learn how to set aside months’ worth of expenses through effective planning and budgeting.

What is an Emergency Fund?

An emergency fund refers to money that individuals and families put aside to cover various expenses in an emergency. In today’s economy, practically anything can happen, so it’s a good idea to have some form of emergency savings available when needed.

Common expenses that an emergency fund can help cover include necessary home repairs, medical expenses, and vehicle maintenance. An emergency savings fund can also cover standard monthly expenses if you or someone in your household experience job loss.

While credit cards exist for the same reason, many people find emergency savings more favorable because using this money won’t incur high-interest charges you’ll need to pay back later.

How Much Should I Save?

When setting savings goals, most financial experts recommend covering three to six months’ worth of your standard monthly expenses. This way, if you or a family member suddenly lose a job, this money will supplement your unemployment benefits until you secure a new form of employment.

Remember that unemployment benefits only pay out a fraction of your past income, and payments only last up to 26 weeks in most states.

For singles, three months of savings should be enough to keep you afloat financially, but if you have a family to support, you should aim to save as much as possible. This is especially true if you don’t have much of a support network (friends and relatives) who would be willing to lend a hand during your time of need.

How to Build Emergency Savings

Steps to Start an Emergency Savings Fund
Assess your financial situation
Set a realistic savings goal
Determine your monthly savings amount
Open a separate savings account
Automate regular contributions
Reduce unnecessary expenses
Prioritize saving over spending
Monitor and track your progress
Celebrate milestones achieved
Stay committed and adjust as needed

There are several ways to build an emergency savings fund effectively, and depending on your circumstances and spending habits, some of these guidelines will be more appropriate than others.

Before you start saving, it’s important to remember a couple of important points. Building an emergency fund takes time, so try not to become discouraged if it takes a year for you to feel satisfied with what you’ve set aside. Two, determining how much you need to save is essential to the planning process.

List your monthly expenses to create an accurate estimate of how much money you need to save. Be sure to include even small payments you make because they add up over time.

Typical expenses include:

  • Rent or Mortgage
  • Gas or Electricity
  • Water
  • Internet
  • Cell Phone
  • Car Insurance
  • Transportation
  • Groceries
  • Prescriptions
  • Pet Food & Supplies
  • Insurance
  • Subscriptions
  • Credit Card Payments

Don’t forget the quarterly and bi-annual payments you might need to make. Also, if your bills don’t have the same totals every month, round the savings amount up instead of down. For example, if your cell phone bill is $200 one month, $223 the next, and $185 the third, save based on the highest bill amount.

Now that those points are covered let’s cover a few tips and techniques you can follow in order to save money.

Determine a Total

Once you have a reasonable estimate of the expenses you pay each month, add them together and then multiply the total by 3 or 6, depending on how many months you plan to aim for. Let’s say your standard monthly payments come out to just under $4,400. If you want three months of savings, your total would be $13,200; if you want six months, your total would be $26,400. This is your main savings goal.

Remember, an emergency fund should always be kept in a separate account from your checking when you start saving. Combining all of your available funds makes it much easier to spend rather than save.

Start Small

Now that you know how much money you need to save put that total away because the thought of saving that much might start feeling overwhelming in a little time.

Break it into smaller goals instead of struggling with a single savings goal. Because you have estimated your monthly expenses, comparing that number against your household’s income will be easy. Let’s say you and your partner make $7,000 a month combined. If your expenses cost around $4,400 each month, that means you have $2,600 a month after paying all of your bills.

You can set small, achievable savings goals based on your monthly income, expenses, and money left over. You might choose to put half of your leftover money away, giving you $1,300 in monthly savings. It’ll take time, but doing this consistently will eventually pay off.

Keep Your Expenses Stable

If you’re trying to set aside a significant amount of savings, do your best to keep your monthly income and expenses as stable as you can. Avoid signing up for unnecessary subscription services, making a big purchase, or opening a new credit card.

You might even consider reducing your monthly expenses, if possible. Don’t cut out all of the little things you enjoy by any means, but if you can save an extra $100 by not eating out as often or an extra $20 by canceling a subscription you don’t use, it’ll help.

Save Automatically

When you’re not tempted to spend the money in your account, saving for an emergency can become much easier. Several finance tools and programs exist to help people increase their savings, so using one or more can give you an extra push. Consider having a percentage of your paycheck deposited directly into your savings account, or use a tool that rounds your spending to the nearest dollar and deposits change into your account for you.

Talk to Your Employer

Not all jobs will have this option available, but some workplaces offer Emergency Savings Accounts (ESAs). These accounts deduct a pre-determined sum from your paycheck at the end of each pay period and deposit it into an emergency fund. In some cases, employers will match your contributions, which can help you reach your savings goals a lot faster.

If this sounds a lot like how a retirement account works, that’s because ESAs are often part of a company’s retirement package. This isn’t always the case, so be sure to gather all the pertinent details about your ESA beforehand.

Save New Sources of Income

If you sell a valuable item (a vehicle, piece of jewelry, or an electronic device) and don’t have much debt to pay off, consider depositing the money you made from the sale into your savings account.  

If you receive them, tax refunds can also be used to increase your savings account balance. While you don’t have to deposit your entire refund into your emergency fund, putting away ⅓ to ½ of your refund will help you reach your goal a bit faster.  

Make Your Money Work for You

Depositing your savings into a separate account is necessary to effectively build an emergency fund. However, not all accounts are created equal. If you want a bonus way to increase your account balance, look for a high-yield savings account. These accounts come with high-interest rates, so the funds you accumulate will continue to grow over time.

While this account won’t make a massive difference without consistent contributions, an account with a high annual percentage yield (APY) will do more for you than an account with no interest.

Here’s an example:

If your savings account has a 4% APY and you have $13,000 in it, even without making any monthly contributions, your total will increase by just over $500 after a year. If you’re depositing half of the $2,600 you have after bills each month, that total will reach $29,428 in a year.

This is compared to an account with 0% APY, which will stay at $13,000 after a year with no monthly contributions and $28,600 after a year if you’re depositing $1,300 each month. Why not make an extra $800 without having to lift a finger?

Saving for an emergency isn’t always fast and easy, but it’s always worth the effort. If you found this article informative, stay tuned for more on financial planning, savings, and setting yourself up for security in the future. Consider sharing these tips with your friends if they’d also benefit from building an emergency fund.


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