You may think you can’t afford to have an emergency fund, but honestly, you can’t afford not to.
What is an Emergency Fund?
An emergency fund is savings that you can access in case of, well, an emergency. The majority of Americans – nearly six in 10 – don’t have enough money to cover even a $500 emergency. You can’t predict when an emergency will happen or how much it will cost to fix it, but you can guarantee an emergency will arise. You want to have money in savings when that happens.
Why You Should Have An Emergency Fund
To pay for emergencies.
The most obvious reason to have an emergency fund is so you can pay for emergencies when they come up. Emergencies can include things like an unexpected car repair, broken appliance, insurance copay, vet bill for your pet, and a number of other expenses. If you have an emergency fund, you don’t have to worry about where the money will come from – you’ll already have it.
So you won’t have to borrow money in an emergency.
Finding money in an emergency can be tough. You may be able to use your credit cards, if you have enough available credit. If not, you may have to take out a bank loan or borrow money from family and friends. Unfortunately, many people don’t have access to any of these options and either have to resort to expensive forms of borrowing like – payday loans and cash advances. Worse, you may have to just deal with the consequences of not fixing the emergency.
So you won’t have to scramble to come up with money for an emergency.
If you can’t borrow money from a bank or loved one, you may have to sell or pawn things to get the money to cover your emergency. And course, you can never get as much for your things as you paid for them (and sometimes not even as much as they’re worth). You could find yourself having to do a lot of selling to come up with enough cash for your emergency.
So you have money to cover you in a job loss.
Obviously, a $500 emergency fund won’t take you very far if is you lose your job. But, $500 is only a starting place. Ideally, you should have several months of living expenses in your emergency fund. Traditional advice says your emergency fund should be enough to pay your bills for three to six months. That gives you time to find a new job. Of course, the more money you have in your emergency fund, the safer you are.
How to Build An Emergency Fund
Like any big goal, you won’t be able to build your emergency fund overnight. Depending on how much extra room you have in your budget, it can take months (or even years) to build up a sizable emergency fund. That’s why you should get started now.
If you’re living paycheck to paycheck, the thought of trying to come up with money for savings can be stressful. Read on for some strategies to stretch your paycheck further and start saving more money.
Use your budget to figure out how much money you can put into savings each month. Don’t resolve that you don’t have any extra money until you’ve actually created a budget, analyzed your spending, and confirmed that’s the case. If your budget seems tight, take a closer look to see if you can eliminate some expenses so you’ll be able to save more. Come up with an amount you can realistically save, even if it’s as low as $25 a month. Save more whenever you can.
Start small. Rome wasn’t build in a day and the same goes for your emergency fund. If you stick to your savings goal, one day you’ll wake up with a few thousand dollars in your emergency fund. But, it probably won’t be tomorrow and that’s ok. Getting started is the important part.
Your long-term goal might be $10,000 or more, depending on your personal cost of living Short-term milestones will keep you motivated. To start, aim to get $250 in your emergency fund. Then $500; $1,000; $5,000; and $10,000. Meeting these smaller goals gives you measurable progress toward your bigger goal.
Make your savings automatic. Once you’ve decided how much you’re going to save each month or from each paycheck, set up an automatic bank transfer for that amount. Or, if your employer allows you to split up your direct deposit, you have part of your pay deposited into your savings account and the other part into your primary checking account.
Treat it like a bill. If you make your emergency fund contributions optional, you’ll choose not to contribute when it gets tough. But, if you consider your money emergency fund contributions a bill, you’re more likely to prioritize your savings and stick to it, even when it gets tough.
Look for ways to make extra money. You can speed up your emergency fund progress – or even reach a few of your other financial goals – by generating some extra income. Are you due for a raise? Talk to your boss about increasing your salary. Or, perhaps you can work some overtime to get extra money in your paycheck. If you’re paid commission, figure out ways to generate additional sales to increase your paycheck. Outside your job, you can look for ways to make extra money. You can use your skills to get work on Upwork or Fiverr. Sell crafts on Etsy. You can babysit, pet sit, or housesit for some extra cash.
Protecting Your Emergency Fund From Yourself
Consider also starting a “splurge” account. As your emergency fund grows, you’ll probably be tempted to dip into it for other things – vacations, new electronics, shoes, etc. You must be disciplined enough not to use your emergency fund for anything but emergencies. Otherwise, you won’t have it when you need it most.
Creating a separate savings that’s designated for “splurges” gives you money to spend whenever the temptation hits.
Use your emergency fund only for true emergencies and replace any money you spend out of it. For your emergency fund to truly function as a financial safety net, you have to make sure it’s always there. That means putting back any money you have to spend from it.