An important step in my debt and budgeting journey is to save an emergency fund. Unexpected emergencies and situations happen to everyone. Financial preparedness can help offset some of the stress and pressure.
I’ve had many unforeseen expenses occur and was never financially prepared for any of them. During a terrible six month period, I had unexpected emergencies with my car, home and pet health issues. I incurred $13,000 debt from unplanned expenses due to these situations. I used my credit cards too often because I didn’t have enough cash set aside to cover the cost.
What is an Emergency Fund?
An emergency fund is a bank account with money set aside to pay for unexpected expenses. Upgrading to new appliances, buying a new flat screen TV, and paying for a vacation trip DO NOT qualify as emergencies.
Some examples of true emergencies include:
- Auto repairs
- Home repairs and/or appliance replacements
- Unexpected medical bills
An emergency fund will help you to be prepared for the unexpected. It will act as a safety net if you lose your job, car transmission needs repair or central air conditioning breaks in the middle of the summer.
Start Small and Set Goals
Most financial experts recommend saving a minimum of 3 – 6 months expenses. That recommendation can seem daunting for people weighed down by debt or living paycheck-to-paycheck. Start small with a goal to save between $500 to $1500 towards your emergency fund.
Depending on your financial situation, you may only be able to set aside $25 each paycheck and that is completely fine! Every little bit counts and every step forward brings you closer to the initial goal. Once you reach the first goal of $500 then move on to the next goal of $1000 and so on. Eventually, you will reach the goal of saving 3 – 6 months expenses.
Select an Account For Your Fund
Your emergency fund should be kept in a bank account with quick and easy access. But, not too easy because you don’t want to be tempted to use it for non-emergencies. If you need to pay for a car repair then you should be able to access the fund rapidly. Consider using a checking account or high interest savings account that comes with a debit card or checks. In addition, it’s a good idea to use a completely different bank from your regular checking and savings.
Personally, I keep my emergency fund at a different bank from my regular accounts. In fact, there isn’t a branch location in my immediate area. I’m able to withdraw funds quickly through a debit card or check. But, I have to be very intentional when I access money from this account. There is extra planning involved if I want to replenish money. I can’t just drive to the bank and make a deposit. Instead, I have to schedule a deposit transfer online from my regular checking which takes two business days to complete the transaction.
By now, hopefully you’ve calculated how much you’re able to save, decided on an initial goal, and chose an account to save for your emergency fund. Next, set up an automatic deposit to streamline the process. Direct deposit is the easiest way to automate. Most employers offer direct deposit and you can easily deposit the savings to your account directly from your paycheck. Alternatively, with most banks you can schedule an automatic transfer from one account to another.
As time goes on, check on your progress and assess whether adjustments should be made. Perhaps, you had to withdraw money for an emergency and need to replenish that money. Or, maybe you got a promotion with a larger salary and can save more now. You might be reducing expenses in your budget and can add more savings. It’s always a good idea to periodically review your budget and determine if you can make improvements.
Continue Growing your Emergency Fund
Each goal you meet during this process is a huge milestone and each should be celebrated. Don’t lose sight of the end goal of saving a minimum of 3 – 6 months of expenses. If you can continue growing your emergency fund beyond 3 – 6 months then keep going! You will be adding a larger security net for yourself and your family.
Having an emergency fund will help you to be prepared for anything and will offer peace of mind the next time a sudden, unexpected expense happens.