First Thing’s First: Building An Emergency Fund

Emergencies come in all shapes and sizes. An unexpected car repair. A freak accident that leaves you with a hefty hospital bill. A zombie apocalypse. You get the point.

Whatever form the emergency could take, would you have the funds to cover the cost? Many would not. In a recent study, almost half of Millennials said they wouldn’t be able cover an immediate expense of $2,000 or more. That’s not good.

If you’re in the same boat, here are some tips for building an emergency fund.


1. Start with small monthly goals

Experts recommend setting aside 3-6 months’ worth of living expenses in your emergency fund. That’s a lot. If it sounds too hard, try breaking it into smaller goals. Maybe set aside $500/month for your emergency fund. Or try saving 10% of your income.

Whatever amount you choose, it should be small enough that you don’t have to live as a hermit (unless that’s your thing) or sell an organ, but big enough that you can reach the 3-6 month threshold within 2-3 years. And remember, starting is the important part. After all, it gets you into the habit of saving, and some emergency fund is better than none. Also, before you know it, you’ll have a solid buffer in place.

2. Review your day-to-day spending

If you’re having trouble finding money for your emergency fund, it’s probably time to review your day-to-day spending. Generally speaking, your spending should follow a simple rule of thumb: 50% to needs, 30% to wants, and 20% to savings/paying off debt. The 50% to needs is for stuff like housing, transportation, utilities, groceries, minimum loan payments, child care, and insurance. The 30% for wants is your fun bucket. And the 20% is where you should account for your emergency fund.

If your spending doesn’t fall within the 50/30/20 rule, figure out how you can you get there. Maybe it’s less lattes, more get togethers at your apartment instead of the bar, or potlucks over restaurants. For more ideas on spending less, check out our 8 hacks to save money.

3. Put any unexpected income into your emergency fund

Did Great Grandma put a $50 check in your birthday card? Or did you get a bonus or a tax refund? Create a rule that you throw any unexpected income – big or small – into your emergency fund until you’ve reached your goal. You won’t miss the money, since you didn’t expect it in the first place. And by automating where the money goes, you’ll make the saving process less painful.

4. Use a savings account in Timbuktu

Okay, not really. But for your emergency fund, you should use a high-yield savings account that is moderately inconvenient to access. We suggest opening a new account – specifically designated for your emergency fund – with a different bank or credit union from your other checking and savings accounts.

The extra effort to withdraw the money, combined with the psychological barrier between your emergency fund and the rest of your money, will make you less likely to dip into your emergency funds when you shouldn’t. Also, by using a high-yield savings account, you’ll earn a bit of interest while your money waits in the wings.

5. Use your emergency fund for the unavoidable and unforeseeable

An emergency fund is for, uhh, emergencies. That is, unavoidable and unforeseeable occurrences. That shouldn’t include concerts – even if it’s a secret show for your favorite band – or a new VR headset – even if it’s 50% off on Amazon – because they are avoidable. Nor should it include the expenses you can see coming. Many people forget about recurring, one-time expenses like annual insurance payments or car payments. But you’re reading this, so you won’t. 🙂

6. Periodically check your progress

Check your emergency fund progress every few months. If it’s not going as well as you’d hoped, look for specific and attainable ways to improve. Maybe you bring your lunch to work a few times a week. Or you switch to a cheaper gym.

If, on the other hand, you are dominating your emergency fund, a small reward is in order. A bottle of wine? A pumpkin spice latte with an egg and cheese sandwhich? #TreatYoSelf.

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