How to Build an Emergency Fund

Building an emergency fund can be one of the most important financial steps you can take. It can help you prepare for unexpected expenses, like a job loss or car repair.

Experts recommend saving at least three to six months’ worth of your monthly living expenses. However, the amount you need to save will depend on your personal situation and other savings goals.

1. Set a Goal

An emergency fund is a great way to protect yourself from unexpected financial setbacks. It’s a safety net to help you cover unexpected costs like home repairs, medical bills and car accidents.

You can build an emergency fund by saving a fixed amount each month. One way to do this is by setting up automatic transfers from your checking account to a savings account. This makes it easy to save money without having to think about it, and it can make reaching your savings goal much easier.

When it comes to building an emergency fund, experts typically recommend that you set aside at least three to six months of living expenses. But this number is personal, and the ideal size depends on your individual situation.

To figure out the ideal emergency fund amount, start by looking at your expenses on a regular basis. Tally up how much you spend on housing, utilities, basic food, transportation and care for kids or pets.

Then, calculate how much it would take to cover those costs for six months if you lost your job or faced an emergency that required major home repairs. Once you have an idea of the total amount, you can work on developing a savings plan to reach your target.

A good place to put your emergency fund is in a separate savings account that’s not tied to your bank account, such as a money market account. These accounts offer rates similar to savings accounts, and they have some checking features, making them a great option for emergency funds.

Once you’ve established your emergency fund, set a goal to increase it over time. You can do this by increasing your monthly contributions or by making changes to your spending habits. This can include buying a cheaper car, skipping your two-week vacation or cutting back on dining out to add to your savings.

2. Make Savings a Priority

Having a savings plan is essential to building a financial buffer and protecting yourself from unexpected emergencies. Without it, you might run into a car repair, lose a job or have to pay for medical expenses that could derail your goals and leave you in a worse situation than you were before.

The first step is to set a goal for how much money you want to save. This can range from a few thousand dollars for an emergency fund to several months’ worth of living expenses for people who are sole breadwinners or business owners.

Once you know your savings goal, figure out how much you need to put away every month. Start by looking at your monthly expenses and identifying which ones are essential, such as mortgage payments, car insurance, utilities, credit card bills, and other bills. Next, identify those you can cut or reduce.

For example, downgrading your cell phone service or skipping that two-week vacation are simple ways to build your savings. Taking on a part-time job or picking up a service gig are other ways to increase your income and put money aside for saving.

You might also consider using a money-saving app, like Mint. These apps connect with your bank accounts and categorize all of your transactions, so you can see where your money is going each month.

Once you’ve figured out your goal and how much you need to save each month, you’ll be ready to start making it a priority. Start by setting a small goal, such as 10 percent of your take-home pay, and make it automatic. This will help you establish a savings habit that can be sustained over the long term.

3. Set a Target Date

Building an emergency fund is a must for every responsible household. Not only does it protect your finances in the event of unexpected expenses, but it also helps prevent you from getting into debt again when a financial crisis strikes.

To begin, take a look at your budget and see how much money you have left over after paying all of your monthly bills. Then, determine how much you can comfortably save each month without feeling guilty about it.

Typically, experts recommend saving enough to cover three to six months of living expenses. However, that amount will vary depending on your personal circumstances. For example, if you are a single-income family with a dependent spouse and children, you may need more than three months’ worth of expenses saved.

You can start by setting up a separate savings account for your emergency fund. A high-yield money market account is ideal for this purpose. It can be opened online in less than five minutes, and you can set up automatic transfers from your checking account to move the extra funds into the emergency fund on a monthly basis.

Once you’ve established an emergency fund, come up with long-term goals that you can save for as well. These might include a down payment on a house, equity-boosting home improvements or achieving retirement savings goals.

When you start saving for your emergency fund, remember to keep it separate from any investments in the stock market. A lump sum of cash tied up in a savings account can throw your investing strategy off track, and the longer you’re able to invest it without needing access to it, the better.

In addition, you can make it easier to build up your emergency fund by reducing the number of expenses you’re spending each month. Reducing your monthly cell phone plan, insurance premium or utility bill can free up extra cash each month that can help you reach your emergency fund goal.

4. Make Savings a Habit

Building an emergency fund is a critical step in financial stability. Most experts agree that having three to six months’ worth of expenses put away should be your starting point. While it may seem daunting, even a small amount set aside each week can grow into a substantial sum.

Once you’ve established how much you want to save, the next step is to make saving a habit. That means putting money away consistently, even when you’re feeling overwhelmed or don’t feel like it.

One easy way to build up your savings is to automate transfers from your checking account to your emergency fund on the same day each month. That makes the transfer invisible and doesn’t allow you to spend it before you’ve got a chance to save it, said Sam Waltman, senior wealth advisor at Los Angeles-based Kayne Anderson Rudnick.

Another way to get into the saving mindset is to cut back on some of your expenses. That may mean avoiding that coffee every morning or skimping on some of the luxuries you enjoy, such as an expensive restaurant meal or a nice new pair of shoes.

Keeping track of what you’re spending can help, too. Use a personal finance or banking app to see how much you’re spending on your everyday purchases and identify areas where you could trim back and contribute more.

If you have an irregular income, try setting up an automatic transfer from your paycheck to your emergency fund each month. It may take time to build up a large amount, but it’s well worth it once you do.

Once you’ve built up a solid emergency fund, the next step is to keep it separate from your checking account and spend it carefully. This will help you avoid dipping into it for non-emergency purposes, which will help your savings grow faster and more likely.

5. Make Savings a Priority

Having an emergency fund is critical to maintaining your financial goals. It protects you from unexpected financial setbacks like car repairs, medical emergencies, or job loss.

The amount of money you need to save for an emergency depends on your individual situation, but most experts recommend saving enough for three to six months of living expenses. This is enough to cover basic needs, including rent or mortgage payments, food, clothing, and other essentials.

You should set aside a specific amount to save each month, and use that to make regular contributions until you’ve reached your goal. You can even set an automatic contribution each time you get paid so that your savings automatically grow.

Before you start making savings a priority, take a look at your monthly budget. This will help you determine exactly how much you spend each month and where you can cut back. You can also use a budgeting app to categorize all of your transactions, making it easier to track your spending.

Once you’ve determined how much you’d like to save, decide on a target date and write it down so you remember to stick to your savings plan. Posting your goal in a prominent place will remind you to keep working towards it every day.

Another way to make saving a priority is by setting up an auto-deposit account or money market account for your emergency fund. This will make it easy to access your money in the event of an emergency, and will allow you to earn more interest than if you just leave it in your checking account.

Getting into the habit of saving will take time and practice, but it’s well worth the effort. You’ll be able to build your emergency fund more quickly, and it will give you confidence that you can tackle whatever life throws at you.