5 steps for building an emergency fund

Paul Appleton
Posted by Paul Appleton
Consumer Banking

Building an emergency fund is a smart protection for you and your family.

Bearded, middle-aged man packing up items from his desk into a cardboard box.No matter how careful you are at planning and budgeting, unexpected challenges arise all the time. These things can lead to temporary cash crunches or even larger financial problems without having an emergency fund to tide you over.

Reasons you may need one

Below are just a few of the important reasons families need to have emergency funds:

  • Sudden unemployment
  • Prolonged illness
  • Major disaster (fire, flood, hurricane, tornado, etc.)
  • Medical emergencies
  • Death in the family
  • Emergency travel from home (for illness or death in the family)
  • Emergency car repairs
  • Major home repair (new roof, furnace, plumbing disaster, or the untimely death of an appliance)

Life tends to throw some nasty curveballs at times, and there are plenty more reasons than these to have a solid emergency fund set aside for rainy days.

5 steps to help your progress

Here are five practical action steps to help you build a solid emergency fund:

Determine a dollar amount goal for your emergency fund.

Unfortunately, there isn’t a magic number that works for all families. I recommend that you have at least three months’ income saved in an emergency fund.

The FDIC gets more specific, recommending that you add up the total of your monthly expenses in order to come up with an accurate figure for your monthly needs. This includes housing, transportation, medical costs, utilities, childcare/education, and food.

Once you have the monthly total, make a goal of setting aside at least three months’ worth of these essential expenses as your emergency fund.

Devise a plan to reach your goal.

While the goal may seem hard to achieve, consider starting to save in small steps – perhaps saving $25 per month. This can help make saving a habit, and the compound interest over time (depending on the type of savings account you choose) may help your emergency fund grow. It is a good idea to keep the bulk of your emergency funds in low-risk, interest-bearing accounts like savings accounts or a money-market fund, according to the U.S. Department of Labor.

You may also consider other sources of funds that may help, depending on your circumstances. For example, having a home equity line of credit (HELOC) on standby – or even a credit card — may help you raise funds more quickly. But, of course, you have to consider carefully the requirements that accompany those options (e.g., interest, paying down debt).

Examine money leaks or overpayments for expenses.

Now it’s time to come up with the extra money – without feeling as though you’re making massive sacrifices to do so. Compare your monthly expenses to look for areas where you may be overpaying each month. For instance, compare mobile plans and see if you might do better by choosing a pay-as-you-go plan rather than a locked in multiple-year subscription. The same with television. Now that there are options like streaming services, is cable television really necessary for you?

You might even consider adjusting your thermostat for savings, clipping coupons, or cancelling unnecessary magazine subscriptions for further savings.

Automate the process to ease the challenge of saving.

Rather than you manually making the payment to the right account(s) each month, consider automating the process to occur within minutes of your biweekly or monthly pay check hitting the bank. With direct deposit and easy transfers from one account to the next, you may even set up recurring monthly deposits. (Check with your bank; you may be able to allocate direct deposits among several different accounts.)

As an added way to deposit a chunk of money into your emergency fund, you may consider having a tax refund automatically deposited into your designated account.

Designate the funds solely for emergency use.

Some people make the mistake of treating an emergency fund like a regular savings account. If you use these funds for vacations, meals out, or any other reason other than an emergency, you’ll find the money isn’t there when real emergencies hit.

These tips may help start your emergency-fund planning so that in a possible time of need, the funds will help see you and your family through.

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  • Anonymous says:

    I was having trouble dedicating myself to saving and found an app called ‘Digit’ that automatically pulls money from your designated account and puts it in to another account with Digit. In my first month using it, I’ve already saved about $50 and didn’t even know it was happening! Saving small amounts that I won’t miss is the best way for me to get the emergency fund rolling.

    Reply | 4 years ago
  • Anonymous says:

    Such a great article with many good tips. Speaking from experience, once you start creating your ‘rainy-day’ fund, it can almost be fun/challenging to watch that account grow beyond 3-6 months of expenses.

    Have been doing this with automatic payments (but still logging in monthly to validate) and then keep a running/monthly spreadsheet so you can go back and see where you’ve come from! Gets easy once you commit to it!

    Reply | 4 years ago

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