Unanticipated circumstances can be a tremendous source of financial stress. Job loss, car trouble, medical or dental emergencies, unexpected home repairs, and unplanned travel expenses can burden even the most balanced of budgets.
But having money set aside in an emergency fund can provide peace of mind — and the assurance that you will be able to handle unforeseen expenses without going into debt.
Why You Should Prioritize Emergency Savings
Having an emergency fund can take some of the stress out of countless scary situations. After the initial shock of a crisis gives way, it’s not uncommon to experience a second wave of anxiety as you start to consider the financial implications.
If you haven’t built an emergency fund, you might be forced to use credit cards or personal loans, which often come with high interest rates. Other sources of fast cash — withdrawing from your 401(k) or other retirement accounts, selling investments, or asking friends and family for assistance — can lead to penalties, fees, and additional emotional distress. And taking out extra insurance in anticipation of any and all potential hardships can cost you more than the eventual payout.
On the other hand, having a safety net means you’re prepared to handle most situations without the added financial stress.
Having an emergency fund also can lead to improved financial practices across the board. Keeping that money in a separate bank account keeps it out of sight and out of mind, as the old saying goes. When funds are not available to spend via debit card, you’re less likely to use them frivolously on non-necessities.
Having a separate account for your emergency fund also makes it easy to see at a glance how much you have — and how much you still need to save to meet your goals. It’s the ultimate preparedness tool.
How to Start an Emergency Fund
You might have heard that you should keep about two months’ worth of your salary in your emergency savings, but most experts agree it’s best to build a financial buffer that can cover your household expenses for three to six months. Of course, it does take some effort to accumulate this much emergency funding. Here are some tips to get you started:
- Take a close look at your budget. Understanding exactly where your money goes will help you identify opportunities to save. There are a number of budgeting apps that make it easy to learn how to set up a budget. These typically provide a monthly budget template, which can guide you through calculating your income and expenses, categorizing your spending, finding opportunities to reduce your expenses, and improving your overall financial health.
- Set a clearly defined goal for your emergency fund. Once you’ve taken the time to calculate your expenses, you know exactly how much money you need each month to cover monthly costs like housing, food, utilities, and other necessities. Simply multiply that sum by six, and you have the amount necessary to get by for half a year should you find yourself facing long-term struggles. Setting aside that much money might seem daunting, but find some comfort in knowing that it takes most households a substantial amount of time to reach this goal.
- Automate, automate, automate.Many people use direct deposit to route payroll into their checking accounts, which eliminates the manual process of taking physical checks to the bank. If you’re working to build an emergency fund, it might be helpful to set up a split direct deposit. This allows you to divert a specific amount to your emergency fund while sending the rest to your checking account. Automation can greatly simplify saving, making it that much easier to achieve your savings goals.
- Weigh all options for absorbing financial blows.Your employer might offer additional resources that will help stave off financial setbacks. A health savings account, for example, allows you to set aside tax-free funds for healthcare-related expenses. A Paytient card can also help you pay upfront costs for medical, dental, vision, pharmacy and even veterinary services without accumulating interest or fees.
- Increase your savings over time. As you feel more confident in your ability to save — and as you eliminate costs such as car payments or student loans — it might make sense to increase monthly contributions to your emergency fund by 1% or some other manageable increment. These small increases won’t feel like an extraordinary expense, but they will help you save money even faster.
- Plan to save at least part of any surprise income. Maybe you win the lottery. Or maybe you get an unexpected influx of cash by way of a bonus at work, tax refund, inheritance, or gift. These unexpected windfalls are fantastic opportunities to contribute a chunk of change to your emergency fund.
The most important part of setting up an emergency fund? Never stop saving. Even after you’ve set aside six months’ worth of expenses, it’s a good idea to continue regular contributions to your emergency fund. If you or your loved ones are unemployed for more than a year or hospitalized for an extended period, an emergency fund will go a long way toward staving off stress due to financial problems.
