How to Plan an Emergency Fund in Six Simple Steps
An emergency fund is money you save to use only in case of an emergency. You never know what kinds of curveballs life can throw your way.
Some examples of situations where this money can come in handy are accidents, home repairs, job loss, or unexpected illness. In the best case scenario, an emergency fund is a safety net to get you and your family through an already stressful situation without adding new bills and costs to your daily expenses.
Why you should have an emergency fund
If you suddenly need extra cash, relying on family and friends for assistance may not be the best course of action. An emergency fund prevents you from having to neglect your current payment obligations while ensuring you have the extra funds you need to pay out of pocket expenses without getting a new loan or using a high-interest credit card. If you do not have any savings and are living paycheck to paycheck, an illness or job loss can become financially devastating.
How You Can Save For an Emergency Fund
Our advisors have collected these helpful tips to get you started on an emergency fund:
- Set Realistic Expectations. Start with a low goal such as $500 to $1,000 worth of savings. This makes it more achievable than trying to save three or six months’ worth of living expenses at once.
- Start Small. Save small amounts. Even $10 per week will give you savings of $500+ per year.
- Separate Accounts. Open a separate account for emergency funds. This makes it less tempting to spend, and you can often have your bank restrict transactions. For example, you could have a savings account that is not accessible by bank card or online. If you have to go into the branch to take out your money you may think twice about using it for frivolous things.
- Make savings a habit. Set up your account to automatically deposit a small amount from your paycheck into your savings. Then treat your savings account as another bill to pay each month.
- Put your extra money into savings. If you get a tax rebate or other bonus, allocate some of that money to your savings. You may want to use some for a little fun as well so that you never feel deprived while building up your savings.
- Simplify. Review your budget and cut out any unnecessary expenses.