Starting Your Emergency Savings Fund

November 16, 2021

Starting Your Emergency Savings Fund

What do house fires, car accidents or an unexpected loss of job have in common? They are all sudden and out of your control. 

Life events occur throughout the world every day; however, there is one sure fire thing you can do to keep a bad situation from being worse...have an emergency fund to help prevent unexpected costs from having a negative impact on your overall financial status.

An emergency fund is a safety net that helps cover expenses without breaking the bank, impacting your budget or causing you to take on more debt. Emergency savings are meant to be kept away from your other long-term savings  goals and should only be used in case of an emergency.   

Budgeting for an Emergency Fund

How much should I save for an emergency?  According to the Federal Reserve, four out of ten Americans can’t cover a $400 emergency expense.  Knowing how unexpected life events can be, setting aside cash is important for long term stability and peace of mind. A good rule of thumb is to have at least 6-months of living expenses saved. The amount of emergency cash you save also depends on your lifestyle, committed expenses, household size and income.

How much emergency cash will I need?

Building a financial safety net is often overlooked.  Determining the amount you should keep in an emergency fund can be a daunting thought. In most cases, the hardest part is getting started.  Following these simple steps will help:  

Step 1: Figure out the total you will absolutely need each month

These expenditures include your rent or mortgage payment, utilities, car payments, gas, groceries, phone bill, and any other necessary things you need to pay for monthly. For this  example, we will use $2,000 a month for expenses. 

Step 2: Decide how many months you want the emergency fund to cover

Although it is recommended to save enough for 6-months of expenses, we are going to use 3-months for this example. 

Step 3: Choose how long it will take to fund your emergency savings

This number is based on the amount of money you intend to save each month. For example, we will say that we want to reach our savings goal in the next three years.

Step 4: Do the math

  • Multiply monthly expenses by the number of months the emergency fund will cover. 

         $2,000 * 3 = $6,000 emergency cash needed. 

  • Multiply the number of years you’ll need to save to reach your savings goal by 12 to figure out the number of months you’ll need to fund your emergency account. 

          3 * 12 = 36-months to fund savings goal

  • Divide the total emergency savings goal by the number of months needed to fund your savings goals to determine your monthly contribution. 

          $6,000 / 36 = $167 monthly contribution.

In this example, you will need to save $167 every month for3- years to reach that $6,000 goal in your emergency savings account.

Where to Stash Your Emergency Cash

Now that you understand how much money you need to save to build up your emergency savings, you will want to decide where to save it. It is a good idea to set up a separate account for your emergency fund to avoid the temptation of wanting to get into it for non-emergency use.  A few safe options for storing your emergency fund are:

  • Savings Account: A savings account will give you the ability to access your money immediately in case of an emergency while also allowing you to earn interest from the account in most cases.
  • Certificate of Deposit (CD): A CD is a savings account that holds a fixed amount of money for a fixed period of time and typically has a higher interest rate than a normal savings account. Money is deposited in one lump sum versus multiple contributions.  You will get a guaranteed rate of return based on your initial deposit and the term you select. Keep in mind, if you draw from the funds before the term date is met, a penalty will be incurred.  You could also think about separating or “stacking” your CDs so they mature on different dates giving you access to your money over various time frames rather than all at once. 

Both these options will allow you to separate yourself completely from this fund as it will be only meant for when you absolutely need it. 

Emergency Savings Strategies

Depending on each individual situation, it can be difficult to proactively set aside money for emergency savings. Here are a few ideas to help you save money for a rainy day.

  1. Make savings automatic. Use direct deposit to automatically set aside a portion of your paycheck into your savings account.
  2. Evaluate and reduce your monthly expenditures.  Look at non-essential costs that can be substituted with a less expensive alternative or cut out completely. If you tend to buy a fancy coffee every morning,  cut that cost by making your own at home or wait until you get to work.  Another way to save is to look at whatever subscription or recurring  costs you currently have and determine if you need it or if you can renegotiate a better price.  Try to eat out less and make food at home. Your savings account will absolutely thank you later.
  3. Sell items you never use. If you haven’t used something in quite awhile, it might be a good idea to look at selling it. Selling online will allow you to sell most if not everything you don’t need; there are quite a few free options for you to take advantage of. Another great way to declutter is a garage sale.  You will not only have more space, but more money on top of that. 
  4. Get a side hustle or a part-time job.  Do you have a talent you could charge for? Maybe just extra time in the day that you find yourself doing nothing. That little bit, even a few hours on the weekend, can make your wallet and your budget a lot happier. 
  5. Recalculate your budget each year.  Life happens  differently every year. And expenses change as well.  Make sure you consider the differences and reevaluate your budget for a year in which you may or may not know what’s going to happen or what you think you can afford; it will help you out in the long run.

Bottom line is a savings plan and fully funded emergency account gives you the peace of mind to know that if something were to go wrong in life you would finally be prepared for it! With savings in place, you would not have to worry about going out and getting a high interest payday loan or racking up unwanted credit card debt. This approach to your financial well being will not only de-stress you if something unexpected was to happen but will give you a cushion for anything that comes your way.

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