An emergency fund is something that most people should have but very few actually do. It’s not always easy to save, especially with all the other financial obligations we have.
However, it is so important for a family to have an emergency fund because you never know when life will throw you a curveball and leave you in need of cash quickly.
In this blog post, I’m going to share some tips on how to start and maintain your own emergency fund – even if you’re short on time or money!
What is an emergency fund?
An emergency fund is an sum of money set aside solely for the purpose of covering life’s emergencies. Having an emergency fund is a key part of any money management plan.
These emergencies can include medical events, sudden job loss, repairs to cars and home appliances and basically anything else you wouldn’t make a line item for in your regular budget. An emergency fund has your back when life happens.
How much money should you have in an emergency fund?
There’s no set amount for how much you should have in your emergency fund.
But a general rule is that most people should aim to save somewhere between three and six months worth of expenses in an emergency fund.
If you can’t save three to six months’ worth, start by saving what you can and then work your way up gradually – it’s always better than having nothing at all!
You may even find that as time goes on, if you make a budget and stick to it, those funds will add up to more than three months.
How do I start an emergency fund when money is tight?
If money is already tight, starting an emergency fund might not be the right first step for you.
You should instead focus on eliminating as many monthly expenses as possible and cutting back to basics, including things like cable TV or expensive coffee drinks from your favorite cafe.
If you can afford it, start by saving what money you have – even if it’s just $50 a month.
Once you’ve gotten yourself on a budget, try adding $100 each month (or whatever you can afford) until it builds up and becomes three months’ worth of expenses – this may take time but will be well worth the trouble in the long-run when an emergency arises!
Is a $1000 emergency fund enough?
Saving a $1000 emergency fund is a more manageable goal for most people, especially if you are struggling with money as it is.
Lots of finance gurus advocate a $1000 emergency fund, and whilst it’s a good start, it’s not enough to keep a roof over your head for any amount of time so you should prioritize increasing your emergency fund to between three and six months worth of expenses.
Where do I put my emergency fund?
A good emergency fund should be accessible to you when needed – therefore, it’s best to keep the money in a place where it can easily and quickly be accessed.
A high yield savings or on call account or a mortgage offset account are good options for safety and accessibility.
It can be tempting to want to invest your emergency fund in the stock market, but investing in a volatile environment is not recommended when the funds may be needed at short notice.
5 Ways to Build an Emergency Fund
When you start to build an emergency fund, it’s important to have an amount to aim for. Aim for at least three to six months’ worth of expenses.
Note that we’ve said expenses and not income.
That’s because in an emergency such as job loss, you can usually cut your budget drastically, or to quote my Irish mother in law “you’d cut your cloth to suit your measure”.
Meaning you’d do the best you could with the resources you have available.
For this reason, we recommend setting up a survival or bare bones budget, as part of your personal financial plan.
You can read more about how to set up a survival budget in this article.
- Make sure that you have a budget and stick to it! Knowing where your money is spent and where savings can be made is the most important step to conquer.
- Save as much of your take home pay every month as is possible. Set up an automatic savings plan with a monthly transfer from checking to savings as a first step.
- Consider your lack of an emergency fund as an emergency. Dial back any other financial goals until you’ve fully-funded three to six months worth of expenses in your emergency fund.
- Stash your savings. Bagged a bargain at the supermarket and have $13.45 left in your grocery budget? Move it to your emergency fund. Earned $20 from market research? Straight to the emergency fund. Sold some baby clothes on Facebook Marketplace? Yup, you know what you’ve gotta do. All the little extras will get you to your emergency fund goal faster.
- Avoid unnecessary spending. We’re not saying you need to do a spending freeze but if you find it difficult not to spend money, remove the temptation while you are building up your emergency fund. Find ways to live more frugally, stay out of the malls and swap pricey family getaways for inexpensive staycations.
Saving for emergencies should be an important part of any family’s financial plan.
If the recommended three to six months of expenses aren’t attainable for you, start where you are and use what you have.
Start by saving as much as possible and then set up a system that automatically transfers money from your checking account into a savings account every month.
This will help ensure that when the unexpected happens, you’re ready with cash on hand to take care of it without turning to credit cards or personal loans which can lead to debt in other areas of your budget or life if not managed well.
We think this can be done one step at time so don’t get discouraged – just keep plugging away!