How To Start Saving For An Emergency Fund

How To Start Saving For An Emergency FundIf you want to achieve financial security, you need to start saving for an emergency fund. But what exactly is this fund?

This is a type of savings account that will be used only for unexpected events. That means you do not know when this will be spent. This fund will act as your fall back or reserve fund. When you no longer have money to pay for an emergency expense, you will dip into this fund to help you survive. You can probably assume that this fund will keep you from borrowing money and putting yourself in debt.

Unfortunately, a lot of Americans do not have an emergency fund. In fact, around 57 million Americans admit that they do not have emergency savings. Most of the people who do not have an emergency fund are those between the ages 53 to 62.

Obviously, we all need an emergency fund because we never really know what will happen in the future. If you do not have this fund, you will be forced to borrow money to get out of a tight situation. To keep this from happening, you need to start saving for an emergency fund.

5 steps to start your emergency fund savings

Fortunately, getting started on your emergency fund will only take 5 simple steps. If you follow these steps, you can start saving from scratch.

Step 1: Know your emergency fund target.

There are many rules surrounding an emergency fund. Some experts say that you have to save at least 6 months worth of expenses. Others say that you need to stretch it until 9 months. There are those who are more lenient with 3 months. It really depends on what you think you can afford to meet and what amount will make you feel secure.

If you want to be smart about it, try to see the average time an unemployed individual spends in between jobs. If it is approximately 6 months, then you know that you need at least 6 months worth of expenses to live on. That way, if your primary source of income is compromised, you have enough money to spend until you get a new job.

Step 2: Find out how much you spend each month.

Since you will be basing your emergency funds on your monthly expenses, the second step involves making a list. There are two ways for you to do this.

The first is you can make a list of exactly what you spend. This is the unfiltered list. Whatever you spend each month will be multiplied by the number of months that you intend to have in your emergency fund. This list will include both wants and needs. That means it includes entertainment expenses and other unnecessary things you spend on.

The second list is the filtered list. You can even refer to this as your frugal list of expenses. It will only contain the expenses that you need to survive on. No unnecessary expenses will be included here. Obviously, this will result in a lower target amount. But if you use this as your basis in saving for an emergency fund, you will have to live a frugal life for the 6 months that you will use it.

Ideally, what you can do is to base your savings on the first list. But when the time comes that you need to use it, follow a frugal budget. That way, the 6 months worth of emergency funds can last longer.

Step 3: Analyze how much you can really save.

Since you have looked into your expenses already, you should already look into your budget. Find out how much you can afford to put aside each month so you can save for your emergency fund. What expenses can you give up so you will have room for your emergency fund savings? Can you save $250 each week? Or can you only save $100?

It does not matter if it is big or small. The important thing is to set an amount that you can stick to. Even if you put aside $50 each week, this will grow over time. It will become $200 at the end of the month. At the end of a year, this will add up to $2,400. Sure it will take longer but as long as you do not stop, your emergency fund will grow.

Step 4: Open an emergency fund account.

Did you know that there are 10 million Americans who do not have a bank account? It is not clear why. Maybe it is because they do not have the money to save anyway. Or maybe they just do not want to make the effort to open an account. While it is true that you need your emergency fund where you can easily access it, that does not mean you should put it in a jar. You want to access it, but you do not want to make it very easy. Having a bank account is the best way to keep the money without having it too near that you will be tempted to spend it.

But even if you have a personal account, it is advised that your emergency fund is placed in a different one. That way, it will be easy for you to put the money there and then forget about it. If you do not have the amount in your mind, the temptation to use it will be gone.

It is important to note that you have the option to place your emergency funds in an investment account. At least, put some of it there. Leave a month’s worth of savings in a bank account and then invest the rest. This will help make your emergency fund grow – compared to just placing it in a savings account.

Step 5: Automate your savings.

Once you have opened an account specifically for saving for an emergency fund, you need to setup an automatic deposit. Talk to the bank that you have chosen to inquire how you can set this up. This is easier if you opened your account in the same bank where your salary is deposited. You can ask the bank to automatically transfer from your salary to the emergency fund account. That way, you do not even have to hold the money. It will be transferred without you knowing it. Usually, when the money does not pass through your hands, you will not really miss it.

How to increase your emergency fund contributions

Saving for an emergency fund is not something that can happen overnight. Unless you won the lottery and you have the good sense of putting it in your emergency fund – expect that this will take a long time to complete. Not only that, unexpected events can happen along the way. That means you might be dipping your finger into your emergency fund before reaching your target.

That should be okay as long as you follow strict rules in using your emergency fund.

But even if you are strictly following the rules, the fact remains that you need to exert enough effort to increase your emergency fund contributions. Because if you fail to have enough to meet an unexpected financial need, you might end up being in debt. According to a survey, 47% of the respondents admitted that they will cover an emergency expense by borrowing or selling something. This is true even if they only have to come up with $400.

The good news is, there are ways to increase your emergency fund contributions. Here are two ways you can go about it.

Lower your spending

This is the fastest way for you to free up money to save in your emergency fund is to lower your monthly expenses. This is available money that you can spend immediately. Of course, the only problem with this is that you are limited by your income. But nevertheless, the money can be a big help to help you in saving for an emergency fund.

Here are tips that will help you lower your monthly spending.

  • Bundle your services. Usually, companies offer packages that cost less compared to paying for the individual service.
  • Use coupons. This is a great way to avail discounts. Even a couple of dollars in savings is always a good thing.
  • Convert to energy efficient appliances. Although you will spend at first, this will help lower your monthly energy bills.
  • Look for freebies. There is nothing like getting something for free.
  • Do-it-yourself. There is nothing like a DIY project that can help you keep costs down. From cooking to making your own household cleaning products – there are so many things that you can save on if you only do them yourself.
  • Pay your bills on time. This will help save on the fees and charges that will be imposed on you if you fail to pay your bills on time.

Earn extra money

Another way to increase the contributions towards your emergency fund is to earn more money. The great thing about this option is you can earn as much as you can. There is no limit to what you can add to your emergency fund.

Here are the options that you can use to increase your income.=

  • Ask your employer for extra projects or hours. This will help increase your monthly income.
  • Get a second job. This is probably more tiring because getting a part time job on top of your full-time job can be stressful.
  • Opt for an online job. This is a great way to earn extra while staying at home. You can earn as a freelancer for online businesses. You can also take surveys or answer tests for a fee.
  • Use your house. If there is extra space in your attic, basement or garage, you can rent it out for storage space. In case there is an extra room that you are not using, you might want to fix it and use it as a rental (e.g. Airbnb).
  • Sell your things. If there are things that you no longer need, it should be a great idea to sell them and add the profit to your emergency fund.

Consider these tips when you are saving for an emergency fund. The faster you save, the more secure you will feel about your finances.