Emergency Fund 101


Unfortunately, things can (and will) happen that seem to derail your plans or force you to hit the “reset button” when you least expect. While we certainly wouldn’t wish some of life’s unpredictable events on anyone, we know that at times, some (or maybe all) of us will be thrown that curveball.

Wondering what you can do to protect yourself from these instances? Let us present to you: the Emergency Fund.

What are they?

An emergency fund is just another name for a stash of cash that you could rely on in case of an emergency or some other unpredictable event (like losing your job, needing to pay more than expected for a medical bill, a flooding basement, sick pet, etc.).

Tigger requires his own emergency savings account

Why have one?

Things do happen, and having to rely on the support of friends or family to help you is not always a great or enjoyable strategy. Additionally, paying high credit card interest is no way to live. Imagine the debt you may have to endure if you need to take out a credit card just to pay some bills in the event of an emergency. That interest doesn’t care if you lost your job or if you’re down on your luck. Having an emergency fund handy provides such peace of mind in these types of difficult circumstances.

How much should I have?

This can depend, but generally speaking, it can make sense to have at least 3-6 months of your income saved in an emergency fund. This way, you have enough money set aside to help you get by and still cover all of your current expenses if your income suddenly ceased to exist (or was reduced). Note: if you have unpredictable income or a very unsteady employment situation, consider adding an additional month or two of income to your emergency fund just to be on the safe side. We recommend that households with one income stream have 6 months of savings where 3 months of savings is okay with 2 income streams.

How do I build it?

There are different strategies to get your savings started. These strategies cover a range of situations, including if you have a limited ability to save or if your pay tends to fluctuate. It may be that you could use all of these strategies, but if you have a limited ability to save, managing your cash flow or putting away a portion of your tax refund are the easiest ways to get started.

Strategy: Create a savings habit

Building a savings of any size is easier when you’re able to consistently put money away. It’s one of the fastest ways to see it grow. If you’re not in a regular practice of saving, there are a few key principles to creating and sticking to a savings habit:

  • Set a goal. Having a specific goal for your savings can help you stay motivated. Establishing your emergency fund may be that achievable goal that helps you stay on track, especially when you’re initially getting started. Use Consumer Finance’s savings planning tool  to calculate how long it’ll take you to reach your goal, based on how much and how often you’re able to put money away.
  • Create a system for making consistent contributions. There are a number of different ways to save, and as you’ll read below, setting up automatic recurring transfers is often one of the easiest. It may also be that you put a specific amount of cash aside each day, week, or payday period. Aim to make it a specific amount, and if you can occasionally afford to do more, you’ll watch your savings grow even faster.
  • Regularly monitor your progress. Find a way to regularly check your savings. Whether it’s an automatic notification of your account balance or writing down a running total of your contributions, finding a way to watch your progress can offer gratification and encouragement to keep going.

Strategy: Manage your cash flow

Your cash flow  is essentially the timing of when your money is coming in (your income) and going out (your expenses and spending). If the timing is off, you can find yourself running short at the end of the week or month, but if you’re actively tracking it, you’ll start to see opportunities to adjust your spending and savings .

For example, you may be able to work with your creditors (like your landlord, utility companies, or credit card companies) to adjust the due dates for your bills, or you can use the weeks when you have more money available to move a little extra into savings.


Strategy: Take advantage of one-time opportunities to save

There may also be certain times during the year when you get an influx of money. For many Americans, a tax refund can be one of the largest checks they receive all year. There may be other times of the year, like a holiday or birthday, that you receive a cash gift.

While it’s tempting to spend it, saving all or a portion of that money could help you quickly set up your emergency fund.


Strategy: Make your saving automatic

Saving automatically is one of the easiest ways to make your savings consistent so you start to see it build over time. One common way to do this is to set up recurring transfers through your bank or credit union so money is moved automatically from your checking account to your savings account. You get to decide how much and how often, but once you have it set up, you’ll be making consistent contributions to your savings.

It’s a good idea to be mindful of your balances, however, so you don’t incur overdraft fees if there’s not enough money in your checking account at the time of the automatic transaction. To help you stay mindful, consider setting up automatic notifications or calendar reminders to check your balance.


Strategy: Save through work

Another way to save automatically is through your employer. In addition to employer-based contributions for retirement, you may have an option to split your paycheck between your checking and savings accounts. If you receive your paycheck through direct deposit, check with your employer to see if it’s possible to divide it between two accounts. If you’re tempted to spend your paycheck when you get it, this is an easy way to put money aside without having to think twice.


Where should I keep it?

Money saved for an emergency should be highly accessible and stored in a safe and secure place. (READ: do not invest it). Open a safe and secure high-interest (aka: high-yield) savings account with minimal or (ideally) no account minimums or fees. Our favorites include Ally Bank, Capital One 360, or Oak View National Bank. For more suggestions as to where to open your account, consider hopping on over to Bankrate to view their most updated list of recommendations.


The bottom line?

Protect yourself and start setting aside money in an emergency fund TODAY. We hope you never need to use the money, but if you do, you’ll be glad you have it!

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