Life happens! You want to be prepared as best as you can. One way to prepare is to build a robust emergency fund. You want a separate fund you never touch that is only for emergencies. A good rule of thumb is to have at least 3-6 months of living expenses saved up to cover your monthly bills and groceries should a large unexpected expense arise.
Let’s talk about how you can build up that emergency fund.
Step 1: Determine your current financial situation
Calculate all your monthly expenses and determine your essential monthly costs (rent/mortgage, utilities, groceries, transportation, etc.). This is the baseline for your most important expenses that must be covered every month. Then, identify all of your income sources (salary, side hustles, etc.) and calculate your total net income. This will help you determine how much money you are clearing each month after taxes.
Now, subtract total monthly expenses from your total monthly income. For example, let’s say you have $3,000 a month in expenses and you bring in (net) $5,000 a month. That leaves you with $2,000/month for non essential expenses and savings.
Now you can determine your emergency fund goal. Again, aim for 3-6 months of living expenses to start. To use the example above, you would need a goal of at least $9,000 or 3-months of living expenses saved up ($3,000 x 3 months = $9,000). So, the question now is how do you save up that money?
Step 2: Create a Budget
You have probably heard this one before, but create a budget so you can track your spending and monitor where your money is going. You can do this with a spreadsheet, notebook, or budgeting apps like Nerd Wallet or Copilot Money. If you prefer your own spreadsheet or notebook, list your expenses in one column and your income in another.
With a budget, you are now able to track your spending and monitor where your money goes. Then you can identify areas to cut back, such as non-essential expenses (e.g., dining out, entertainment, subscriptions).
Besides tracking spending, you also want to prioritize savings by allocating a specific amount to your emergency fund each month.
Step 3: Increase Income
If you need to make more money, consider a side hustle. Explore side gigs like freelancing, driving for ride-sharing services, or tutoring. If you are a teacher or have a skill that you can teach others, tutoring can be a great way to make extra income!
Also, if appropriate, consider negotiating a raise with your employer. Discuss your value with your employer and request a raise.
Step 4: Automate Savings
Saving money takes some discipline! Maybe you want to eat out or do something fun, or you have your heart set on a want versus a need. Before you know it, you have spent what you have left over after expenses that month. So, how the heck do you stay disciplined enough to save that money instead of spending it?
The best way is set up automatic transfers. Schedule regular transfers from your checking to your savings account. This way it happens automatically and you do not have to give it any thought. Better to delegate this process to automation, so you don’t have to worry about it every month.
Other useful tools you can utilize are “Round-Up” Apps. Apps like Acorns or Stash round up your purchases to the nearest dollar and invest the difference.
Bank of America debit card holders can enroll in “Keep the Change” where purchases you make with your debit card are rounded up, and the amount needed to round up to the next whole dollar is automatically transferred into your savings account. May not seem like a lot, but it can add up quickly if you use your debit card a lot!
Step 5: Utilize Windfalls Wisely
Did you receive a large sum of cash?? Congratulations! First thought should be to put it directly into savings! Deposit tax refunds, bonuses, or unexpected income into your emergency fund. This will be a huge boost towards your goal!
Step 6: Stay Motivated!
It helps to visualize your goals. Set reminders or create a visual representation of your savings progress. You can create an image of a thermometer with the temperature markings as dollar values and fill in the thermometer as you add more money to your emergency fund. This allows you to see how you’re doing and celebrate when you do reach that goal. Always great to see your hard work pay off when the “temperature” increases each month.
Be sure to reward yourself (Moderately). Celebrate milestones with small rewards to stay motivated. Perhaps it’s a speciality coffee at your favorite coffee house or a clothing item you have had your eye on. Keep the price of the reward at a reasonable level so as you avoid wiping out any chance at savings money that month. It is important though to reward yourself after saving for awhile towards your goal. You deserve it and you’ve earned it!
Step 7: Regularly Review and Adjust
Throughout the year, sit down and re-evaluate your budget. Perhaps every three months or so, adjust your spending plan as needed based on changes in income or expenses. Life is very dynamic and life happens, so decide where you can either increase savings, or perhaps you have to cut back on how much your saving temporarily.
When you are able, aim to increase your savings rate. Gradually increase your savings contributions as your income grows. If you got a raise and are expecting more money every pay period, here’s your chance to increase your automatic savings amount!
Final Thoughts!
Important Considerations When Building Your Emergency Fund:
- Open a High-Yield Savings Account. Choose a savings account with a competitive interest rate to maximize your returns, such as Betterment. They offer higher yields than most other banks and are FDIC insured.
- Make sure your emergency fund is accessible in case of unexpected events. That means avoid putting your emergency fund in assets like 401Ks or other retirement accounts or assets like real estate. A savings account is really the best way to save money, as it is the most liquid.
- Most importantly, avoid tapping your fund for non-emergencies. Use your emergency fund only for true emergencies (job loss, medical expenses, car repairs).
By following these steps and remaining consistent with your savings efforts, you can build a robust emergency fund that provides financial security and peace of mind.
