Everyone needs an emergency fund, but not everyone has one. Some may not know what an emergency fund is yet! If that's you, don’t worry. We'll be explaining the ins and outs of building an emergency fund to plan for any financial emergencies that may come your way.
What Is An Emergency Fund?
An Emergency Fund is an amount of money, usually in a bank account, that is set aside to cover financial emergencies. These funds are created to ensure coverage for financial crises without causing an extreme change in your daily life and budget.
When Do I Use My Emergency Fund?
You should only use your emergency fund during a financial emergency. Financial Emergencies are unexpected events that cause a financial strain in your life. Here is a list of potential emergencies that would sanction the use of your emergency fund.
- Unexpected Job Loss
- Unexpected Medical and Dental Expenses
- Unexpected Travel
- Unexpected Car Expenses
- Unexpected Home Repairs
- Unexpected Death
One thing you will notice in this list is that they’re all “unexpected” events. Remember this, because if you are expecting an event, you should do your best to plan and budget for it in advance without using your emergency fund.
How Much Money Should I Have In My Emergency Fund?
At a minimum, you should have at least three months of your everyday living expenses completely covered, including your mortgage/rent, gas, utilities, and food. An excellent long-term goal for your emergency fund is to have anywhere from four to six months of living covered.
So, How Do I Get My Emergency Fund Started?
Monthly Savings Goal
First things first, you need to set a realistic goal for how much you will be adding to your emergency fund at the end of every month. It should be a consistent deposit, planned either by dollar amount or percentage. If you are unsure about meeting a dollar amount goal at the end of each month, consider using a percentage goal instead. Using a percentage as your goal every month might make it a little easier if your budget fluctuates regularly. For example, committing to depositing 20% of your standing checking account at the end of each month may be a more realistic goal than $200.
Cut Unnecessary Expenses
When you're in the process of building your emergency fund, it's the perfect time to reevaluate your everyday small purchases. If you don’t need something, don’t buy it. Try to focus on bulking up your emergency cushion before treating yourself. Once you have created a firm cushion, preferably with at least one to two months of full expense coverage, you can start loosening up your pockets again.
Save Your Change
Now might be a good time to dust off that old piggy bank because every penny counts! Loose change is usually the last thing on anyone’s mind, and as humans, we're prone to losing stuff, especially those small coins that we've subconsciously deemed as invaluable. However, despite your outlook on change, it can make a huge difference! Placing change jars in various places around your home, job, and car will work wonders when it comes to saving coins. If you are consistent with collecting your loose coins, you’ll be shocked by how fast they add up. One last tip for saving loose change: instead of depositing it or exchanging it for cash immediately, keep the coins for as long as you can so you’ll be less tempted to spend it.
Assess & Adapt
After a few months of building up your emergency fund, take time to see how much money you’re saving, and don’t be afraid to adjust it. If you find yourself with excess funds at the end of the month, don’t hesitate to add some extra padding to your emergency cushion. On the other hand, if you need to lower your monthly savings goal, that’s okay too! Just remember to be responsible and not reduce your monthly savings simply because you miss the extra cash.
Holding yourself accountable for your emergency fund is very important. The amount of discipline you have can make or break your cushion. If you do decide to make unnecessary adjustments that will negatively impact your emergency fund, remember you’re only hurting yourself. After all, it is your emergency cushion.
Being financially secure is a long-term goal for us all, but you need to be willing to take the first step. Discipline and responsibility play an essential role in securing a financially stable future, so don’t forget to hold yourself accountable. We hope that with the information and advice in this article, you’re able to begin building a stable emergency fund! Good luck!
Want to start saving for your future too? Check out 6 Smart Ways to Save for Your Future.
Check out How to Create Your Budget to better manage your finances and save for your emergencies!