Creating an emergency fund is one of the first steps to prepare yourself for an unforeseen crisis. It can happen to anyone. While some may lose their job, others might find themselves in need of money for dealing with a critical medical emergency.
Only fewer than half of U.S. adults (47%) have an emergency or rainy day funds that would cover their expenses for three months.
Also, according to a survey from Bankrate’s latest Financial Security Index, nearly 28 percent of U.S. adults have no emergency savings.
These statistics prove that a lot of people would be in major trouble if they were suddenly faced with a financial emergency. By creating an emergency fund, you can ensure that you cover the unexpected expenses that come your way.
Further, an emergency fund safeguards you from becoming dependent on your credit card. It also protects you from falling in debt or running out of money.
What Are the Best Practices for Creating an Emergency Fund from Scratch?
Here is a look at a few steps that will help you build an emergency fund.
- Decide How Much Money You Need to Save:
Start by looking at your monthly budget. Look through the past few months’ bank statements. It will give you an idea of the amount of money you typically spend.
When you are trying to save money to add to your emergency fund, try and minimize unnecessary expenses such as dining out frequently and cable. The money you save can be directed towards the emergency fund.
As a general rule, you should put six months’ worth of expenses in your emergency fund. However, the situation might vary from person to person. While a single person with fewer expenses can save three months’ worth, a family with a sole breadwinner must try to save for nine months.
- Begin with Small Steps:
Once you have a general idea of your necessary monthly expenses, create an emergency fund goal for yourself. Saving a huge amount may seem difficult. Hence, start with small steps and break your goal into smaller chunks.
For instance, you can start by saving $200 this month, followed by $300 in the next, then $500, and so on. A little dedication in this matter will help you reach your long-term financial objective.
- Determine Where to Keep Your Emergency Funds:
The goal of creating an emergency fund is having instant and easy access to it in case of a crisis. You can accomplish this by keeping three months’ worth of savings in a high-interest savings account.
Moreover, you can put the extra funds in low-risk and-high liquidity vehicles such as a money market account or a certificate of deposit.
Also, keep your emergency funds in a separate account. It is even better to open this account in a bank you usually don’t go to. It will reduce your temptation to withdraw money from it.
- Automate Your Savings:
From saving more to getting out of debt faster, automating your savings can help you do it all. It is a great way of prioritizing your funds. When you get your salary, it sends a fixed amount of money to your emergency fund by default. So, you are essentially paying yourself first.
You can automate your finances by setting up an automatic deposit for your savings account through a checking account or another deposit account. If you get a direct deposit from your employer, you can ask them to deposit a part of your paycheck directly into your savings account.
When picking an account for automating your savings, ask the bank about their fees and the monthly maintenance charge. Remember, account fees can disrupt your saving goals. Hence, it may be better to opt for an online savings account that’s free of charge.
Keep a track of your progress after you automate your savings. It is gratifying to witness consistent growth in your savings each month.
- Look for Ways to Add to Your Emergency Fund:
Explore new ways to add to your emergency fund. You can sell unused items from your home, cancel monthly subscriptions, and rent out a room in your house to contribute towards expanding it.
Based on your qualifications and interests, you can even work a second job to increase your income.
You can also increase your emergency fund by depositing any extra money you receive. Transferring work bonuses and tax refunds is a good way to enhance your rainy-day fund.
You can take the help of local financial professionals too. They can assist you in planning your finances and taxes seamlessly in keeping with your state-specific tax laws.
For instance, Florida-based residents can work with Florida financial advisors to gain the maximum benefit. Local wealth planners can help you find the best ways to save money and contribute to the emergency fund.
- Keep Savings Consistent:
You should add to your emergency fund consistently. Don’t stop saving even if you have reached your long-term savings goal.
You never know when you may need a large sum of money. In circumstances such as a medical emergency, for example, your salary may not entirely cover your exorbitant bills and other expenses. You might have to dig into your emergency fund.
You also need to replenish the amount you take out if you ever tap into your emergency fund.
An emergency fund is a great way of saving for a rainy day. Remember, the prime objective of your emergency fund is to meet unanticipated, but necessary expenses. By creating an emergency fund, you can prepare yourself to deal with financial emergencies. Begin with one step at a time and build your emergency fund gradually. Go ahead, make your future financially secure, and alleviate your stress and concerns.