How to Build an Emergency Fund?
Emergency funds are extremely important today. It allows your retirement/investments to function efficiently because you don’t need to draw on them to handle these emergencies.
How Much Is Needed
This is important to know because it gives a target to shoot for. Most financial experts would suggest 3-6 months of your monthly expenses and I would also suggest this range.
While this may seem daunting for some, a good place to start is figuring out what your monthly expenditures are. According to a 2019 Consumer Expenditure Survey released in September 2020, the national average household monthly expenses are $5,253. This will be different for each person/family so it’s important to figure it out individually.
As an example, we will use the reported number of $5,253 and if we apply this to our 3-6 month rule our emergency savings amounts are respectively:
How To Start
As with any goal we must build a plan and then execute it. With our total goal defined we can move on to the saving part. If our goal is $15,759 (3 months should be our first goal if we don’t already have it) I’ll show you how much you will need to save each month for a few different time periods to give you an idea of what it will take.
This is just an example and the math will need to be done to fit your individual expenses and savings goals. It is completely ok to start saving only what you can and then add more as time goes on. These numbers are just for a frame of reference. Once you have determined the monthly amount you will be saving, the best and easiest thing you can do to stay on track is automate the transfers. If you automate the savings it takes out the hassle of you having to remember and also will guarantee you save the same amount instead of saving what is left over after expenses.
Tips To Save
During the time you are calculating your monthly expenses take a few minutes to go through and separate the wants and needs. This is a great opportunity to notice areas that are changeable. Some of these might include insurance, phone/internet, online shopping, and subscriptions. Check out my other article called 3 Tips to Saving for Retirement where I go over “paying yourself first.”
Pay special attention to the amount that is spent on dining out, fast food, or convenience stores. Experience has taught me that those small purchases add up. This is especially true with grocery shopping. I’ve been using an app called Whisk because it not only lets me plan meals ahead of time it also lets me pick the number of servings and automatically add the ingredients to a grocery list. I’ve cut down on both my bill and food wasted.
Where to Put Savings
Typically most people have their emergency savings in bank/credit union accounts and that is a great idea. Another idea is to place it into money market accounts (chances are your financial institution already has these) or into high-interest savings accounts. A few good recommendations for high-interest savings accounts are at Ally, Chime, Synchrony, and Varo.
The key here is that you need safety and liquidity so that your money is easily accessible because it is only needed for emergencies. I like to separate emergency savings from retirement savings or even intermediate savings because it allows us to be more efficient with our money. I talk about this in my post How I Manage My Money. The key concept from that is by giving the money you are saving a purpose, it has a multiplier effect.