Unexpected and unfortunate situations like job loss, personal emergencies, and urgent home repairs can come as a shock. They may not only put one in emotional stress but also financial hardship. An emergency savings fund can act as a safety net in such times, preventing one from falling into debt. Building an emergency fund from scratch may seem like a tall task, but one can easily start saving toward it with the right approach.
Set a Goal
An effective way to start saving money from scratch for an emergency is to set a financial goal. Once there is clarity about the total amount one needs to save, it becomes easier to prepare a budget and plan future expenses. In the case of emergency funds, it is ideal to save up enough money to cover at least 3 to 6 months of expenses.
Prepare a Budget
After evaluating one’s emergency fund goals, it’s time to make a monthly budget. To do so, one can start by preparing a list of monthly financial priorities. This should include both necessary and avoidable expenses, such as education, utility bills, gas, shopping, dining, etc. Based on this, one can estimate the amount that can be set aside and added to the emergency fund every month. This tiny step can go a long way in helping one stay disciplined about saving up for emergency funds. When budgeting, one should also try to determine how long it will take them to reach their goal.
Open a Separate Bank Account
Emergency funds should ideally be kept separate from the regular checking account. This ensures not even a single dollar from the savings is spent on any expense other than emergencies. That said, one should open the right kind of bank account that is safe and easily accessible. Opening an investment account is not a good option since it is subject to market volatility. Not only that, withdrawing funds from this account is not as simple, and one might attract penalties for early withdrawal. Considering these factors, the most suitable way of building an emergency fund is to have a dedicated savings account. One can also consider opening a high-yield savings account for their emergency funds. As the name suggests, these accounts offer high interest rates on the account balance, which means the fund will grow over time.
Start Small
When building an emergency fund from scratch, one does not necessarily need to invest a lump sum. Setting aside money every month, even if it’s a small amount, is a more practical and sustainable approach. This way, one can contribute to emergency savings without straining their current financial situation. It’s okay even if someone sets aside just a few dollars from their monthly expenses. One can start small and gradually increase the amount to set aside each month.
Set up Autopay
Setting up automatic transfers is a great way to ensure consistency and discipline in saving up for an emergency fund. This means a fixed amount of money can be scheduled to move from the main account to a dedicated savings account on a set date every month. Automating transfers is a personal savings strategy that helps one avoid the risk of forgetting or skipping contributions due to unexpected expenses. Moreover, it helps one see the monthly contributions as recurring bills and keeps them from ignoring this financial priority.
Monitor the Account
After a few months of saving for unexpected expenses, one may lose track of how close they’ve reached their financial goal. That’s why it is necessary to track the emergency account closely. Keeping track of the account will ensure the savings are progressing as planned. Not to mention, if someone is using a high-yield savings account to build their funds, regular monitoring will help them calculate the amount of interest they’ve earned. It will also enable one to find out as soon as the financial goal is reached and adjust their monthly contributions accordingly.
Put in the Unexpected Income as Well
When building an emergency fund, one must make the most of any extra money they receive during the month. Windfalls, such as bonuses and tax rebates, for example, offer a great opportunity to add a substantial amount to an emergency fund. Likewise, if there are any savings left at the end of the month after covering all expenses, those too can be redirected into the emergency fund. Such occasional and tiny contributions can help reach the emergency savings goal sooner.
Cut Back on Spending
Cutting back on non-essential expenses is one of the most practical ways to boost emergency savings. Small adjustments like dining out less often and canceling lesser-used subscriptions can help one save more money, which can be directed toward the emergency fund. Even though these may seem like small actions, they make a huge difference in the overall savings over time.
Continue Saving Even After Reaching the Goal
If one’s financial situation and budget allow, one should continue adding funds to the emergency account even after reaching the target. This will ease the burden during major emergencies that require more funds. Surplus funds can also help with situations that do not necessarily constitute emergencies but need financial backing, such as career breaks or an addition to family responsibilities.
