STEP 3: Building an Emergency Fund
Disclosure: This article may contain affiliate links for services and sites we trust or use. To learn more, please read our full disclaimer.
Our futures are uncertain, and it's best to be prepared financially for whatever life throws your way. Life happens, and no matter how much we want to be in control — the unexpected can happen.
Things like a job loss, medical cost, car repair, or natural disasters can cause your finances to spiral out of control. Without an emergency fund, you are unequipped to handle these life mishaps, and in some instances, you could fall further into debt.
If you’re already deep in debt, the last thing you want to do is dig a deeper hole. There’s no better way to get out of debt and stay out than with an emergency fund.
More importantly, if you’re living paycheck to paycheck, an emergency fund is essential. It will keep you out of debt and give you peace of mind when life throws you lemons.
Many people are under the impression that you need to wait to save money if you're still in debt, but that's not always the smartest move. I began saving while having credit card debt so that I would be prepared for unforeseen events. Starting an emergency fund is a priority.
STEP #1: SET A SAVINGS GOAL
If you search "How much should I have in my savings account?" you are probably going to find differing answers. Truthfully, there is no right or wrong answer.
How much you save in your emergency fund is entirely up to you. Your circumstances and vision for your life will dictate your savings goals.
However, since many of you prefer a little guidance, I’d recommend starting with a savings goal of $1,000. Even if you’re in debt, this is the minimum amount you should have in your emergency fund because it covers a multitude of financial setbacks.
Ultimately, you want to save an amount that makes you feel comfortable. If you are single and you feel secure with having a minimum of $500 — that should be your savings goal. You should never set your emergency fund goal based on someone else’s recommendation. Doing so may cause discouragement when you don’t meet your goal.
Most importantly It’s best to choose a minimum that will allow you to achieve your initial goal. Once you've reached it, you'll feel more secure, and you can focus on increasing the amount saved if you don't have other impending financial goals.
STEP #2: CHOOSE THE RIGHT SAVINGS ACCOUNT
When selecting a savings account for your emergency fund, I recommend an online savings account and here's why:
1. You can transfer as much as you want into your free Savings Account. You can transfer $5 to your new savings account just as easily as you can $5,000.
2. It reduces the temptation of moving money from your emergency fund to your checking account and using your debit card to make unnecessary purchases.
I highly recommend Capital One 360 savings account. You want your emergency fund to be easily accessible. A Capital One 360 savings account offers a competitive interest rate. I have it attached to my checking account for easy access via a quick transfer on the computer. If you sign up for an account with my link, you'll get a $25 bonus.
Other Recommended Options:
Digit is another great place to open an account and start funding it. It takes just a few minutes to open and connects to your checking account. Get more info here!
Synchrony Bank for an online-only savings account. They offer 1.30% annual percentage yield (which is higher than most savings accounts). Get more info here!
If online savings just isn't for you, that's okay. Just make sure to open one at a different institution than your regular checking account. Here are a few things you should look out for:
● Make sure it's FDIC-insured. FDIC stands for "The Federal Deposit Insurance Corporation." FDIC is a Government insurer that provides insured guarantees on your deposits at member banks–currently up to $250,000 per depositor per bank.
●It offers the highest interest rate available to you.
●No minimum balance requirement.
●It has no fees.
STEP #3: AUTOMATE YOUR SAVINGS
Your budget should tell you how much money you can set aside each month. Using this information, you can either set aside a day to move your savings from your checking to your savings account. However, I highly recommend automating your savings.
The use of automation was extremely helpful to me when I was building my emergency fund. Now that I have a system in place, I’m saving $125 every month without thinking about it. Automating your savings makes saving money easy and less stressful.
If you save automatically, you'll be pleasantly surprised to see how small amounts grow over time. For example, saving $4 per day in your emergency savings account adds up to $1,460 saved in 12 months. Remember, something is better than nothing, and by automating your savings, you're setting up a plan that leads to financial success.
STEP #4: SAVE 6 MONTHS OF LIVING EXPENSES
Once you hit your initial emergency savings goal, continue saving until you can cover six months’ worth of your expenses. Look at your budget and determine the bare minimum for your basic needs each month. Once you have that number, multiply it by six.
I know the number may seem unreachable, but I assure you it’s not. The plan to reach this goal is the same as the plan you used to reach your initial savings goal — automation. Set a savings goal to reach one month of expenses and automate the amount you need to reach that goal. Rinse and repeat until you reach six months of expenses.
The whole purpose of an emergency fund is to take care of you and loved ones when things go wrong. You could get laid off from your job, experience a death in the family, or have a medical emergency. No one wants to think about things like this happening to them, but unfortunately, they do.
When you prepare for these life events such as these beforehand, you free yourself from unnecessary financial worries. You can focus on the matter at hand instead of worrying about how to pay your bills. If you haven’t created a plan for dealing with emergencies, use these steps to create your savings plan today.
STEP #5: KEEP IT GOING!
Once you begin saving, it becomes easier. When you reach your initial emergency savings goals, you’ll be motivated to set slightly larger goals. Remember, I recommend a minimum of $1,000 for your emergency savings, but by no means should you stop there.
Your ultimate destination should be 6 to 12 months’ worth of expenses. Most people aim to save six to twelve months’ worth of expenses (not income) because it ensures their financial security.
Know that there will be setbacks and tests along the way, but don’t allow these things to deter you from becoming financially secure. Keep going despite those setbacks, and you WILL reach your goal.