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How to Build an Emergency Fund

Jun 03, 2016 | 3 min read

Key Takeaways

  • Dump your debt! Interest you save is like money you earn.
  • Put savings on auto-pilot. (Out of sight, out of mind.)
  • Go slow, and don't deprive yourself. Starvation diets don't work.

 

First of all: give yourself a pat on the back for even thinking about your emergency fund.

 

 

Emergencies, accidents, and unforeseen events happen when we least expect them, from health or dental expenses to sudden but necessary car and home repairs. An emergency fund serves as a safety net for those rough times and can help to ease the financial burden that comes along with them. Therefore, it’s recommended to stash away 4-6 months worth of expenses.2

Yet, approximately 25% of Americans have no emergency savings in place at all.1 Some people don’t know how to save, others do not recognize they need to be saving now, and many simply feel they can’t afford it. But even if you fall into one - or a few - of those groups, we’ll break things down and show you how to begin to save and some tips on how to help make that emergency fund grow, starting with some great news: it can be easier than you think.

 

1. Pay down your debt

The first step in helping to accumulate an emergency fund is to start paying down your existing debt. Wiping away debt could leave more money in your pocket to save.

The dilemma: Your debt has a high interest rate and your savings account has a very low interest rate, leaving you with a net loss.

Consider this: If you have $500/month earmarked to pay down debt, use $250 of your available funds to pay down your highest-interest debt (most likely credit cards) then send the other half into an emergency account. Continue doing that until you pay off the card or loan, then go to the next highest-interest debt, and so on.

 

2. A penny saved is a penny earned

If you can put off spending money on large purchases (think wants versus needs) and reduce discretionary spending, you can start channeling that money into your emergency fund.

Also, become a smarter consumer. Consider making use of cash-back cards and rebates. Did you know that rebate sites like TopCashBack and eBates will give you money back for shopping online at thousands of major sites? All you have to do is stop by the rebate site first. And most major credit card companies offer cards with a cash-back option on qualifying charges. Even a dollar saved here and there could add up to significant amounts over time.

 

3. Pay it with your bills

Just as you have bills that have to be paid at the same time every month - mortgage or rent, the utilities bills - consider getting into the habit of putting aside money for your emergency fund every month. If you think of your emergency fund as a bill to be paid each month, it could be easier to incorporate it into your budget and spending plan.

It may sound counterintuitive but research shows that one of the best ways to become a better saver is to stop thinking about it; put your savings plan on auto-pilot. And with 24/7 online banking capabilities, you have the ability to set up automatic, recurring monthly transfers to your emergency fund. For example, if you get paid on the 15th of the month, set up a continuous monthly transfer for that day so that you never see the money in your checking account and won’t be tempted to spend it.

Beyond emergencies, this is also great way to bulk up any savings account, from your 401K to your vacation fund.

 

4. Bonus points

If you have received excess cash whether through an inheritance, bonus, or tax refund, make sure you consider directing a percentage of it into your emergency fund.

For instance, if you receive a hefty tax refund, do your best to simply deposit the check—or at least 25% of it—into your emergency account. The feelings of security and satisfaction you'll get from a fully funded safety net are far greater than the short-lived thrill of buying a couple of new iPads or a trip to Turks and Caicos, however tempting.

 

5. Build your emergency fund slowly

A bit of unconventional advice: don’t rush. Build your emergency fund slowly over time. Don't overfund the account only to repeatedly remove those funds for monthly expenses. Putting that money away (no matter how small each deposit) and not touching it is one of the best ways to be sure it continues to grow.

For best results, avoid scrimping and saving so much that you start to feel deprived. If you never let yourself enjoy an evening out or the occasional clothing splurge, your plan might backfire. Just as many athletes eat a weekly cheat meal to stay focused, we all need incentives to stay the course. Leave room for occasional indulgences.

 

What you can do next

The fact that you’re thinking about your emergency fund puts you far ahead of many Americans. Consider putting these tips into practice and in a few short weeks, you’ll be surprised at how easy it is to expand your savings.

 


Sources:
1. About 57 million Americans have no emergency savings.” CNBC.com, June 20, 2017.
2. Here's How Much Money You Should Really Save For Your Emergency Fund.” Forbes.com, April 15, 2016.

 

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