Life is unpredictable. Your air conditioner may need an expensive repair, or you could have a costly medical emergency.
If you don’t have a financial safety net, you might use your credit card to finance the expense. Unfortunately, that only continues the cycle of debt.
Emergency savings is the perfect tool to help deal with unexpected expenses. This guide shares how to build an emergency fund so that you can have peace of mind when life throws curveballs at you.
What is an Emergency Fund?
An emergency fund is a bank account devoted to paying for substantial, surprise expenses.
Examples can include:
- Major repair or replacement of home appliances
- Large, surprise medical expenses
- Significant car repairs
- Missing a paycheck
- Last-minute travel due to the loss of a family member
Emergency savings do not include minor expenses or anything you purchase for leisure. Those are supposed to come out of your monthly budget.
These savings are meant to help you if you lose your job or have a major expense.
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How Much Should I Have in My Emergency Savings?
Your emergency savings should have enough money to cover three to six months of living expenses.
If you don’t have a savings account, the thought of saving that much can be overwhelming.
Regardless of how difficult that goal may seem, you should still start an emergency fund. You want to begin with the Dave Ramsey baby steps and create a goal to save $500, then $1,000.
This will help you build the confidence necessary to continue to reach three to six times your monthly expenses. It will also put you ahead of many other Americans.
Read our guide on common monthly household expenses to gauge how much you might want to save.
It will take work, but saving your first $1,000 is a terrific way to create a financial buffer to serve your needs.
How to Start Your Emergency Fund
Developing a solid financial plan is an essential part of becoming financially stable. Here are the steps you need to follow to build an emergency fund.
Create a Budget
A budget is often viewed as restrictive or difficult to manage. However, neither is the case. In fact, living on a budget brings freedom to your life.
Budgets allow you to create a spending plan for your priorities. For example, when I first started budgeting, it was at the beginning of my debt payoff journey.
My budget allowed me to have a strategy to attack debt and begin to plan for the future. Financial apps like You Need A Budget (YNAB) make it simple to start and monitor everything in one place.
If you find the platform isn’t for you, there are other YNAB alternatives that operate similarly in helping you get on a budget.
Read our guide on how to create a budget to help you get started.
Track Your Spending
A budget is a plan for your money. Tracking your spending is the key tool to managing your budget. When you track your spending, you monitor every dollar you spend, even if it’s a small amount.
This may seem tedious, but a tool like YNAB can help. When you monitor your spending, you will see what’s leaving your bank account.
If this amount exceeds your monthly income or is close to it, it’s time to spend less. Use this information in conjunction with your budget to identify opportunities to lower your monthly bills.
As you start saving money on your bills, put it in your emergency fund.
Don’t let the savings hold you back, either. Even if it’s only $40 or $50 a month, you want to put it towards your savings.
Create a Goal
If you want to build an emergency fund, having a goal is essential. This is especially true if you’re new to managing your money.
Don’t keep this goal private. Share it with a friend or family member who can both encourage and challenge you.
Additionally, making the goal quantifiable is best for success.
For example, if you want to reach $1,000 in savings, have a timeline and action steps you’re going to take. That will help empower you to continue when you want to give up.
Having a goal was key for me when I was trying to pay off debt quickly. Paying off $50,000 was overwhelming, but breaking it down into smaller chunks with set goals motivated me.
The same can be done when trying to build your savings.
Ways to Build Your Savings
Reaching a fully-funded emergency fund is possible, but it does take work. But, with a little effort you can save $500 a month or more to reach the goal.
Here are some ways to bolster your efforts and save money faster.
Cut Needless Spending
The easiest way to grow your savings is to identify areas to increase savings. This is where tracking your spending is essential.
You want to look at everything you’re spending money on and question the value that you’re receiving from each expense.
*Related: Are you struggling to pay your monthly bills? Read our guide to learn what to do if you can’t pay your bills to stop the bleeding.
As you whittle down your expenses, your newfound funds can go into a separate account devoted to emergencies. This may not grow your savings quickly, but it’s a great place to start.
Furthermore, it’s best to avoid apps that loan you money as that will only continue the cycle of debt.
Here are some common areas to cut:
Cable: The average cable bill is over $200 per month. If you’re struggling to save but are paying for cable, this is the best area to cut.
Live TV streaming services cost a fraction of what you’ll pay for cable. Switch to a streaming service and put the remaining amount towards savings.
Try our free quiz to find a service that meets your needs.
Cell phone: The average cell phone bill is over $140 a month. If you’re paying anything close to that, you can move to a no-contract provider and spend as little as $20 per month, even if you use a lot of data.
There are numerous prepaid phone plans you can choose from that have the same reliability as Verizon but don’t cost as much. Choose one and put the extra towards your savings.
Auto insurance: When was the last time you compared auto insurance rates? You should do it at least annually, especially if you have a good driving record.
Savings will vary, but it’s possible to save several hundred dollars a year by comparison shopping. Those funds can go directly into your savings.
The Zebra is a helpful resource to do this. You can compare rates from multiple insurers instantly and reap decent savings.
These are just three examples of ways to grow your savings. As you track your spending, it’s likely you will identify other opportunities.
Rinse and repeat until you optimize your finances.
Earning extra income is the best opportunity to build an emergency fund. Additional earnings come from two sources, including your day job or a side hustle.
Ask your boss if there are more tasks you can take on or if you can work extra hours. If neither option is available, a side gig is a terrific option.
There are countless opportunities, many of which don’t require special skills. Working for DoorDash is one such option.
As a Dasher, you deliver meals from local restaurants to customers. You can set your own schedule. Driver pay varies depending on numerous factors.
Pay is weekly via direct deposit. Put that money into a high-yield savings account and watch it grow.
Earn cash and create your own schedule!
Deliver food with just a car or scooter. Get started today!
Automate Your Saving
Saving regularly is an effortless way to grow your emergency fund. Thanks to automation, it’s simple to pay yourself first.
Simply ask your employer to make an automatic deposit from each paycheck into a separate savings account. There is no charge to do this, and you can deposit as little as you want.
When I started to do this, I had $10 from each paycheck go into my savings. That amount grew over time to accelerate my efforts.
If your employer doesn’t offer this perk, you can do it at your bank. Ask them to transfer a set amount from your checking account into a savings account every week, two weeks, or monthly.
CIT Bank is a fantastic choice to automate your savings where you can earn 5.05 percent through their Platinum Savings account choice. You must have a daily account balance of at least $5,000 to earn this rate. If you have beneath that, the rate lowers to 0.25 percent.
Save Found Money
Saving money you didn’t expect to receive is a terrific way to start and grow an emergency fund. While it’s not as predictable as cutting spending or earning more, a windfall is a legitimate way to grow savings.
Here are some examples of found money you can add to a savings account:
- A generous tax refund
- Cash from selling items you no longer use
- Finding unclaimed property
- Unexpected refund
No matter what the amount is, put it towards your savings. Every extra dollar you find gets you to your goal quicker.
Setting it and forgetting it is not a reliable way to grow your safety net. Life changes, so you want to check in on your progress at regular intervals.
Quarterly is best as it allows you to get a consistent look without changing too often.
Ask yourself some of the following questions when you check-in:
- Do I have extra money in my checking account I don’t need access to?
- Where am I over or under spending?
- Am I earning more money than I planned for?
- Did I need to pull out savings over the last quarter?
Depending on your answers, you might be able to save more money. If so, you can increase the amount you’re saving each week or month.
Don’t be afraid to pull back if necessary. Growing your savings is a marathon, not a sprint.
Where Should I Put My Emergency Fund?
Your emergency savings should have two traits. It should be liquid, and it should be readily accessible.
Also, it should be a separate account from your checking.
An online bank like CIT Bank is a perfect choice for where to put your emergency fund. It has a low minimum account balance and allows you to transfer money quickly when you need it.
CIT Bank lets you open a savings or money market account with as little as $100. Transfers to outside accounts take just one business day.
Chime is another solid choice. The financial app has no minimum requirement and rounds up each purchase to the nearest dollar, putting the funds in a savings account.
Read our review of other apps like Chime to identify suitable alternatives if the service doesn’t work for you.
Regardless of where you store the money, you want to ensure you don’t foolishly raid it too often. This will hinder your efforts to grow it quickly.
Having it at a different bank is a fantastic way to avoid this while still accomplishing your efforts.
|CIT Bank - start your emergency fund|
$100 minimum deposit requirement
Open a high yield savings account or money market with $100!
What Do I Do After I Reach My Goal?
Once you reach your goal, you shouldn’t stop setting money aside in your savings account. Life is not stagnant, and your needs can regularly change.
Common life changes that may impact your needs include:
- Getting married or divorced
- Having a child
- Buying a new house
- Impending retirement
All of these impact how much to save for an emergency fund. Consistent monitoring of your needs is the best way to stay on top of how much you should save.
You may also need to pull funds from your account over time. If so, you should create a plan to restore those funds.
Building and growing an emergency fund is a vital part of financial success. Having one protects you in times of need and promotes the idea of saving money.
You won’t reach three to six months of living expenses overnight. However, starting with a simple goal of $1,000 is an excellent way to create the momentum necessary to reach your ultimate goal.
What’s another way you’d suggest to help build up a safety net to deal with emergencies?
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