Do you have the stress in the back of your head that your car is going to break down and you won’t be able to pay off the bill to have it fixed? Do you worry about what you would do if you lost your job in the next round of company layoffs? Do you worry about how your roof is going to withstand the next wind storm that rolls into town? Have you wondered how to build an emergency savings fund?
If you have an emergency fund built up, you do not have to stress about these things as much as without an emergency fund. You aren’t always worrying about what you would do if something happens. You’ll have the peace of mind that you have the money to cover the bills as they come.
What is an emergency savings fund?
This is just what it sounds like – money for emergencies. The idea is to save some money in case it’s needed quickly for an emergency such as an unexpected car repair, medical costs for an illness, or a new roof. It is also meant to be savings for an unexpected loss of income, such as from a long-term illness or an unexpected loss of a job.
How much money should you put in your emergency fund?
Financial expert opinions differ on how much you should save. Ideally, you want to save as much as you need to cover the bills if you lose your job and it takes you awhile to find a new one. Try to save 3-9 months income. Chances are, in a two person relationship, you won’t both lose your jobs at the same time, so aim to save enough for one of the two salaries.
Another way to look at how the emergency savings fund is to build enough to cover 3-9 months of necessary expenses. Determine what are absolutely critical (food, mortgage/rent, and utilities). Then determine which ones are not critical (cable, the internet, new clothing, etc). Add your monthly expenses for all of the critical expenses and multiply it by the number of months of savings you want to have on hand. If you are not already tracking your expenses and have no idea how much you are spending on your critical expense categories, read this article for guidance on how to track your expenses.
How do you save the money for your emergency fund?
Does 3-9 months income sound like a lot of money and is overwhelming to you? Remember, any little bit helps.
Start small and work your way to more. Aim to save $600. That will help you for some unexpected car or appliance repairs. Try putting aside $50 per month for a year and you’ll save yourself that $600. Do this for a couple of years and you’ll be on your way. To ensure you are saving this money, update your budget and include this savings as part of your budget. Read this post on how to create a budget.
You don’t have to save it all at once or quickly, the goal is to start saving so that you have the money when you need it.
Where do I save the money?
Initially, start out saving in a savings account with an interest rate. As you accumulate more money, you can move it to an investment account with a higher interest rate. You can purchase cd’s or invest in a money market fund. If you are more comfortable, just keep the money in a savings account. You want to have quick access to the money in case you need it.
The key is to get started and put away some money to start building your emergency savings fund. If all you can do is start with $10-$15 per month, start there. As you can increase that amount, do that until you reach your savings goal.
Also, don’t be afraid to use the money if a real emergency happens. Remember, that’s why it’s there. If you drain your savings to pay off an unexpected emergency, just start saving again after that is paid off.