You never know when an expensive emergency is going to happen, so be prepared. That means having an emergency fund. Whether you experience a medical emergency, car trouble, or a layoff, you'll be glad you had an emergency fund if and when that happens. These tips will help you be ready.
1. Develop a budget
Start off by figuring out your budget. Contributing to an emergency fund means you’ll have less cash from week to week to put toward other things. Determine what you can spare, and make adjustments to your spending habits to free up more for your fund. Use a budgeting app or do some calculating. Look at your regular expenses against your income, and don't forget to budget for entertainment and flexibility. Building an emergency fund shouldn't put a major strain on your day-to-day life, but if you have extra cash, consider moving it to your fund.
2. Figure out a minimum
There's really no limit to how high your emergency fund should be. The more you have available, the better shape you'll be in when something happens. It's a good idea to determine a minimum amount and start there in setting a goal. Once you meet that goal, you can continue building on it. Consider how much you’d need if your income was suddenly gone. Take your mortgage into account, as well as car payments, groceries, utilities, and other bills. It adds up quickly, so this can help you determine an absolute minimum. Try to build at least enough for several months' worth of expenses.
3. Get your debt under control
It will be easier to work toward your goal if you can keep your debt under control.
Brian Martucci at MoneyCrashers suggests setting an initial emergency fund goal of $1,000, and then pausing to pay off debt. "Reducing or eliminating those payments will free up more money for savings, and you can then turn your attention back to your emergency fund," he says. "If you don’t want to wait until you’ve paid off all your unsecured debts, focus on the ones with the highest interest rates and longest terms first. These are almost always credit card debts. Use the debt avalanche or debt snowball method for more efficient paydown." (1)
4. Stop spending money on unnecessary purchases
Before making any major purchase, take a pause to consider whether you really need it. Think about what would happen if an emergency came up and you didn't have the money you needed. It's okay to treat yourself sometimes, but consider if now is the time to do so or if you should be saving that money instead.
5. Schedule your contributions
Figure out how often you want to add money to your emergency fund. Refer to your budget and put more money away when it makes the most sense. If you can afford to do it weekly or at each payday, try it. It will add up. Consider automating additions to your emergency fund. If you ask your employer to put a set amount of each paycheck into your savings account, you won’t see the cash in your checking account and be tempted to spend it. You can also ask your bank to automatically transfer a certain amount from checking to savings on a particular day each month. Then treat it just like you would one of your bills. Again, if it never hits your checking account, it will be easier to live without it.
6. Decide where to keep your emergency fund
Determine where you actually want to keep your emergency fund. Is it in a savings account (2) where it can earn interest? It's a great option, but it's not the only one. Other possibilities include money market accounts (2), CDs (2),
or an IRA (3). For most people, a savings account makes the most sense. You'll be able to easily add funds and access them.
7. Consider a separate savings account
If you already have a savings account, consider opening a separate one specifically for your emergency fund. People often take money out of their main savings account without thinking too much about it. It’s good to have one account that can be used for specific savings goals and another one for emergencies only.
8. Talk to your banker
If you're unsure what's the best way for you to build an emergency fund, have a
conversation with your banker about the different options. They will be able to offer advice and explain all the details and the fine print so that you can make an educated decision and start building your fund in the most efficient way possible.
You never know what life has in store for you and your family. Hopefully, all will be good, but having an emergency fund may be the difference between desperation and getting by in tough times. It's always best to be prepared. Even if you never have to use it, your emergency fund can give you tremendous peace of mind.
- https://www.moneycrashers.com/start-emergency-fund/
- Please refer to the Deposit Account Agreement, Account Disclosure, Deposit Rate Sheet, and Personal Accounts Schedule of Fees for complete details and disclosures.
- To apply for an IRA or to learn more, visit your nearest branch.