How to Build an Emergency Fund

An emergency fund is a truly important thing to have, and if you haven’t begun building one yet—start right now. How to Build an Emergency Fund, TJ Woods Insurance, Worcester, MARelying on credit cards for emergencies will only bring you into deeper debt, and if you don’t have enough available credit it could put you into a tough situation.

If you don’t currently have money saved, then the first step to build an emergency fund is to change what you are doing, because it isn’t working. Which area in your life you need to work on changing is going to be different for each person. Maybe you go out to eat too often or you are more focused on paying off your student loans than saving money.

A general rule of thumb is that you should begin your emergency fund with $1,000. Of course, that amount is not going to last you for 6 months if you lose your job, but if the car breaks down then it should cover repairs. If you need to use this $1,000, do your best to replenish within the next few months, even if it means having to make some big cuts. Somehow it seems that life’s troubles tend to happen in close succession.

Squawkfox has a lot of great tips on how to build an emergency fund, as quoted below.

Your situation may be similar, or very different — and that’s OK. The amount of money you keep in your safety stash must be an amount that makes sense for you. Do you have debt? Kids? A mortgage? An illness? Are you single or married or supporting an Ex? Do you live in a single or dual-income household? Are you worried about losing your job? Do you have variable income? And are you clumsy?

Knowing the answers to these questions is a start, but the point here is to get a grasp of your expenses and know how much money you need on a monthly and yearly basis. Download the free budget spreadsheet to figure out your finances and better understand your household costs. Once you know your financial needs, it’s far easier to set your financial goals and aim for a modest emergency fund.

Considering the idea of saving just $1,000 sounds a lot more doable than saving tens of thousands of dollars. Do not, under any circumstances, touch this money unless it is a true emergency.

Once you have that sum of money under control, then you can begin saving for six months’ living expenses. Maybe. Depending on your level of debt, it may be more beneficial not to build an emergency fund over $1,000 just yet.

If you are in the process of climbing out of a mountain of debt, you should focus primarily on paying that debt down. Consider it this way—which is building more interest, your debt or your savings account? Unless you cut some insane deal with your bank, the interest accruing on your debt is exponentially more than what you gain from keeping that money in your savings account. Before you can build an emergency fund, you need to pay down your debt.

Once your debt is paid, you can begin investing in an emergency fund. Six months’ worth of expenses should only include the things you absolutely need—such as a place to live, transportation to get to work, etc. While new clothes are important in the way that you present yourself at work, they are not vital. Neither is your gym membership—running outside is free. A cell phone data plan is only necessary if your work requires it. You will not need to include any of these things when creating your six month budget.

Saving doesn’t need to be difficult, and it doesn’t need to be done all at once. The following tips will help you know how to best build an emergency fund.

1. Start simple, start small. Rome wasn’t built in one day, and your emergency fund won’t be either. So take a breather and start small by squirreling away $10, $25, or $50 each paycheck. It doesn’t sound like a lot, but this cash will add up.

2. Schedule your savings. One financial guru calls it an automatic deduction, I just call it scheduling in some common sense. Many bank accounts let you transfer money at regular intervals on a schedule. If you automate the process you won’t hesitate to pull the savings trigger. Pick a day each month, automate the money move, and watch your emergency savings grow.

3. It’s a bill, so pay it. You pay your bills, right? Treating your fledgling emergency fund as a bill could help you to boost savings faster. You wouldn’t want to skip paying rent, phone, or internet, so don’t skimp on paying your savings fund. Changing your mindset from should do to must do is how to make it work.

4. Hit your pay before it hits your hands. Some people just can’t resist the call of cashing in a crisp new paycheck. If you’re one of these people (be honest), contact your human resources department and ask about setting up a payroll deduction directly into your savings account. If you can’t touch the money, it won’t run away from you.

5. Slash, cut, and save. This is where I get mean and tell you there’s money leaking out of your life — you just need to know where to find it. Downgrade your TV package, cancel that gym membership, and try any of these 50 Ways to Save $1,000 a Year to make that emergency fund a reality. You have the money, you just have to want to save it.

An emergency fund is vital to cover things that your insurance doesn’t always fix, such as car issues or medical expenses. If you don’t have insurance, then an emergency fund may not be able to cover a true emergency.

Contact the agents at TJ Woods Insurance to learn more about how our insurance policies can help you avoid having to dip into your emergency fund needlessly.

What is the biggest emergency fund that you’ve ever saved? Please share in the comments section below!