How to Save for an Emergency Fund

Let’s face it—life doesn’t always go according to plan, including our finances. The car breaks down, and you have a car crisis. The furnace hiccups and you have a furnace crisis. You lose your phone and you have a phone crisis. Compounded, you now have a financial crisis on top of the car crisis, furnace crisis, and phone crisis.

If you don’t have the means to pay for unplanned expenses, what do you do now to cover it? Short-term borrowing will increase the costs to your bill (interest) and selling items in an emergency to get cash quickly never feels good. One of the easiest ways to cushion the blow of the financially unexpected is to establish an emergency fund.

How do I set up an emergency fund?

Because you don’t know when you’ll need that money, you want to have put your emergency funds in an account that you have access to at any time, like a traditional savings account or money market account.

You don’t want to go to withdraw from your emergency fund and not be able to take out the money you need because it’s in an investment product like a Certificate or individual retirement account (which can come with penalties for early withdrawal).

When do I start saving?

Even if you have other financial goals that you’re looking to achieve, either short-term or down the road, you want to think of your emergency fund as your first financial goal. Even if you’re paying off debt, planning for retirement, or saving for other long-term goals, your emergency fund should be your priority.

How do I save for an emergency fund?

What are some good ways to establish an emergency fund if you don’t yet have one? Begin by creating a budget, or spending plan, that distributes your dollars to cover bills, spending, and savings. In addition to writing down expenses that you know you should budget for, like your regular monthly bills, you want to budget for potential emergencies that you can’t predict. That means your emergency fund should not be meant for things like car maintenance, home maintenance, holiday shopping, or other items you know you’ll have to pay for down the road. Plan for those with other financial goals built into your budget.

While you’re building your budget and starting to save, it’s important to look at your habits (good and bad) and figure how you will be successful managing your money and keeping your emergency fund intact for those so-called “rainy days.”

What’s going to be the easiest way for you to not touch your emergency savings? Would it help to have your savings in a different account or even at a different bank? Will labeling your “emergency fund” as such mean you’re less likely to touch it? Should you “hide” the savings account to make it harder to see your finances?

See what you can do to customize your banking habits and accounts to work better for you so that you know if you put this money away in savings, it’s going to stay there until you need it for an emergency.

How much should I save?

So how much should you save in an emergency fund? Ultimately, an emergency fund should be able to cover three to six months’ worth of living expenses. Depending on your financial situation, that can be a lot of money to set aside!

Building up savings for the first time can be daunting and a big change in your saving and spending habits. So, if you don’t have an emergency fund already, you want to start small. Set a smaller goal of $500 to $1,000 to jumpstart your emergency fund. Then, you can slowly chip away at your goal by saving a little bit each month, whatever you can afford.

You don’t want to commit too large an amount monthly and then potentially have to pull that money back out because you aren’t used to having less money to spend for normal expenses. By starting with a smaller savings amount, you get yourself into the financial habit of putting money away regularly, instead of feeling like you have that money to spend on a monthly basis. That way as you’re building up an emergency fund, you can feel confident that you can leave that money set aside for the unexpected.

After you have reached that first goal, keep going! Create subsequent goals that over time will get you to that full three to six months’ worth of savings. Once you feel confident that your emergency fund is growing appropriately, that’s when you can add in other financial goals as your budget allows.

An emergency fund is meant to help you reduce your stress surrounding finances. Having a plan in place means when unexpected things happen, you’ve already thought ahead and accounted for it. Start an emergency fund today!