How many times do you hear about saving money for a rainy day? Yet, remarkably, financial surveys show that more than 50% of Americans don’t have enough funds to cover an unexpected expense. Luckily, it's never too late to start saving.
What is an emergency savings fund?
One of the keys to achieving financial health is to be prepared for unexpected expenses. But how prepared are you if you get hit with an unexpected financial emergency?
The purpose of an emergency fund is to help you cope with financial expenses in times of crisis, illness, loss of job and other unforeseen emergencies. Setting aside an emergency fund is crucial so you can avoid ending up with enormous debts in unfavorable circumstances.
How much money should you set aside?
Building an emergency fund can be difficult. Many people can struggle in an unstable economy, and a large number of households are living from paycheck to paycheck.
Ideally, setting aside funds for three to six months’ worth of expenses is recommended. This amount should help you cover your expenses as you get back on your feet in the event of a medical emergency or unemployment.
How to Start Building an Emergency Fund
Having an emergency fund that can cover six months’ worth of your expenses can be a large amount. Saving up this much money may seem like a daunting task. However, you can save over time by simply putting aside a small amount each month.
Set a monthly savings goal
Decide how much you want to save. Set a savings goal, and determine how much you can allocate from your monthly income to reach your goal.
Take it slow
Building a large emergency fund can feel overwhelming. So start with small milestones. The key is to remain focused, and push yourself until you achieve your goal.
Set up a separate account for your emergency fund
Set up a separate account for your emergency fund so that you won’t be tempted to use the money on your regular expenses.
Cut down on your expenses
If you are serious about building a solid emergency fund, you’ll need to make sacrifices on some of your current spending habits. You can do this by cutting down on clothing, entertainment, and unnecessary splurges. You can also cook your own meals, and pay attention to where your money is going – or in other words, simply live a more frugal life.
Stick to your budget
Create a budget, and commit to it.
Use your smartphone
Install a budget app to help keep you track of your expenses.
Pick up a side hustle
To maximize the amount of money you’re putting away in your emergency fund, you may want to earn extra income to accumulate more cash. Use your free time to earn extra income. Set up a garage sale, rent out your spare room on AirBnB, or offer a tutoring or babysitting service. The extra cash can go a long way to building up your emergency fund.
When unexpected circumstances arise, having an emergency savings fund can make all the difference between financial stability or financial ruin.