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Starting an Emergency Fund

Starting an Emergency Fund

The big question now: how will you pay for it?

If you’re like many Americans, you might put it on your credit card and hope for a miracle before the bill comes due. That’s not the ideal solution, but it may need to suffice if you don’t have savings readily available.

Once you – and your account balance – have recovered, consider starting an emergency fund to give yourself a cushion for when life throws the unexpected at you. Whether needing a trip to the ER, a major household or auto repair, or some cash flow after a job loss, knowing you have money stashed away will help you feel financially awesome in a not-so-awesome situation.

How much should I save?

The general rule of thumb is to set aside three to six months’ worth of expenses. To get a good idea of how much you spend each month, start keeping track of essential and nonessential purchases.

This exercise serves a dual purpose. First, it helps to determine a number to strive for as an emergency fund savings goal. Second, it helps to identify areas in which you could be saving more money, such as impulse buys and luxury items.

Where should I keep it?

Since emergency funds should be easily accessible at a moment’s notice, the money is often best kept in a dedicated savings or money market account. The downside to this option is that interest rates are relatively low, which means your money may not keep up with inflation. It’s important to keep in mind that these funds are meant to help in a pinch, not serve as investments.

Some financial advisers think that keeping all emergency funds in a money market account is unnecessary because you’re unlikely to need it all at once. You could choose to keep three months of expenses liquid and another three months in a low-fee index fund to maintain some growth potential.

Whichever approach you choose, keep emergency funds separate from your regular savings account – and hands off except in a true emergency. A great deal on this year’s best TV or rock-bottom airfare to check out Big Ben are not emergencies.

How do I
build up that much?

Three to six months of expenses might sound out of reach, so set small goals that feel attainable, such as $250 or $500 within a month or two. Know that every time you reach a milestone you’re better equipped to handle an emergency.

Here are a few tips to get you on your way:

  • Set up monthly automatic transfers from your checking account to your emergency account, paying yourself as you would a bill. Remove the temptation of spending cash you see on drinks and Ubers before you get around to saving it.
  • Look for easy ways to tighten your belt. Ride your bike, carpool or take public transit instead of driving – even just a day or two a week. Downsize subscriptions or eliminate memberships that you don’t use fully. Stick to a shopping list at the grocery store, and keep an eye out for specials and digital coupons.
  • Save “bonus” income. If you sell your old camera on eBay, rent out your apartment on Airbnb while out of town, or score a tax refund, send the windfall straight into your emergency fund.