Tips for Saving Money for an Emergency Fund
Guest Post Submitted by Alek Sabin
If a financial emergency came up today, would you be in huge trouble? If you suddenly needed to spend $1000, would it completely destroy your monthly budget? Would you need to resort to credit cards? These are questions that you should be asking yourself if you don’t already have money tucked away for a rainy day. If you answered yes to each of those questions above then it’s time for you to start saving for an emergency fund.
Too many people, this seems like a huge step; a major obstacle that they can’t hurdle. However, when you sit down and break down your finances, it is probably a lot more possible than you think. Below are some tips to remember when starting to plan your emergency fund.
What Do You Need an Emergency Fund for?
What are the types of things that you should break into your emergency fund for? The answer is only for things that you need to sustain your life and livelihood. This all depends on your life and what your specific needs are. For example, a car isn’t something you inherently need to survive.
However, your job might require you to drive there every day, so if your car’s engine stalls, or the transmission goes out, or you need a new set of tires, or you experience any number of car issues, then that is a situation where you need to break into the emergency fund. Health issues are also a big thing that you should have an emergency fund for, which is important since medical debt is one of the most common types of debt that people experience today.
How Much Do You Need?
One common question that people ask about their emergency fund is “how large does it need to be?” Well, the answer to that is highly contextual. Your emergency fund can either be as large or as small as your lifestyle needs it to be. It is common practice to try to have at least $1,000 tucked away for emergencies, but you don’t need it all at once.
Even if you could just throw between $50-$100 into a saving account this month, that could quickly grow to several hundred dollars. However, if your monthly budget is considerably higher, then $1,000 might not cut it. Ideally, you want to be able to put away at least one month of your expenses into an emergency fund, so that you will have a lot of runway for that emergency.
Where Do You Keep an Emergency Fund?
Once you start saving money for your emergency fund, where should it go? You need a place where it is safe, secure, and very liquid. In other words, this is one of the times where a savings account is fairly useful (keeping your general savings in a savings account isn’t very wise since that money is static and decreases in value each year). A high-yield savings account can be immediately accessed for an emergency, has federal insurance for up to $250,000, and will still maintain some value from interest.
How to Build Your Emergency Fund
Now, how do you go about building your emergency fund? The first thing you should do is sit down with your current monthly budget (or make a new one, if you’ve never done it before) and figure out how much you can realistically afford to put away each month. If you sit down and find a way to put down a couple of hundred bucks into savings, then you can quickly build up an emergency fund that will offer you peace of mind.
However, even if you can’t afford to put that much away, there are other savings techniques that will help you save the most you can from your income. For example, putting any change you get during the month into a jar is a small, but sure way to build up at least something each month.
You can also get into the habit of moving over leftover money in your checking account to your savings on payday. This is a good savings habit since most people develop a lifestyle that they can maintain on one check during a pay period, so the excess money isn’t something that you need in your checking account right away.
Let’s Chat > Do you have any tips for saving money?