Finance Fix: How To Build An Emergency Fund

The truth is, none of us are immune to the occasional unpleasant surprise. From a broken down car or sick dog, to unexpected home repairs or job layoff, an emergency fund can help ensure you are prepared for whatever life throws your way. Think of it as a form of personal insurance against life’s messy moments. An emergency fund also serves as an alternative to reliance on credit cards and personal loans, which you could spend years paying off and come with costly fees and interest rates.

If you haven’t started an emergency fund yet, here are some helpful things to keep in mind:

Include It In Your Budget

Review your spending habits from the past 6 months and look for areas you can cut back on so you can reallocate this money towards your emergency fund. Consider using an online budgeting tool to help you keep track of your monthly expenses. Like any form of savings, include a pre-determined contribution amount in your monthly budget and should be treated as a priority. Make the contribution at the beginning of the month, rather than waiting until the end, when you may be tempted to spend the money elsewhere.

Keep Things Separate

If you simply make your contributions to your regular savings account, it can be difficult to distinguish between savings and your emergency fund, and this can lead you to end up spending the money on non-emergency expenses. Instead, open up a separate savings account. Like the expression “out of sight, out of mind” goes, this will make it easier to leave the money alone until you really need it. Many banks offer automatic transfers, so you can open a new account for your emergency fund and have money automatically transferred to it as often as you’d like. Without seeing it, you won’t even miss it, but you’ll be thankful it’s there when you need it!

How Big Should It Be?

A general rule of thumb is that an emergency fund should cover at least 3 to 6 months’ worth of expenses, however this may vary slightly depending on your circumstances. Keep in mind it will take some time to build up your emergency fund, but starting small is better than nothing - even $500 stashed away can help you out in a pinch.

Keep Your Emergency Fund for Emergencies

What doesn’t count as a good use of your emergency fund? Unplanned for splurges such as a vacation or new TV. These types of expenses should be saved for in a separate fund. While it may be tempting to use that readily available money for an extravagant purchase, it would take some time to replenish your emergency fund, and the last thing you want is to actually be hit with an emergency expense and not be fully prepared.

Dealing with finances is stressful enough. When it comes to your financial wellbeing, keeping a well-stocked emergency fund is key.

Though it can take some time to get started, maintaining an emergency fund can give you peace of mind, alleviate financial stress, and prevent you from entering into unmanageable debt-territory.