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Wondering how to build an emergency fund? In this post, I’m breaking down the simple steps to help you start your emergency fund and be more financially prepared.
You’ve heard that you need to have an emergency fund, but do you have one? If not, do you even know where to begin?
It’s hard to change your spending habits and save money. You want to have money for things you need now.
But, you know it’s also important to have money for things that may come up unexpectedly in the future. And you want to be prepared.
But, how?
I’ll show you how to build an emergency fund – the easiest way. You’ll be glad to have this money set aside, in case an emergency ever comes up.
How to Build an Emergency Fund
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Use the free Ibotta app to get cash back on things like groceries, travel, and mobile purchases. You can get the app for free and get $5 when you upload your first receipt!
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Why do I need an emergency fund?
If you don’t already have an emergency fund, you need one. Plain and simple.
When unexpected expenses come up, that’s the easiest way to get off track from your budget. Life happens and unexpected costs will come up.
By having an emergency fund, you will be able to take care of those expenses without wrecking your whole budget and debt payoff plan.
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How much should I have in my emergency fund?
A good rule of thumb is to have 3-6 months of living expenses saved. You can easily figure this amount based on your budget or by looking at your past 3 months of bank statements.
My advice is to open a separate savings account just for this. Make the money hard to get to.
Related Post: The Multiple Bank Accounts You Need to Budget Better
Don’t have a debit card attached to the account, unless you want to keep it somewhere safe – not in your purse or wallet – so you can pay directly from this account when you have to, instead of transferring money to another account or making a withdrawal.
I would label this account in your online banking EMERGENCY SAVINGS. You need to label it and know what this money is for – only emergencies.
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How to Build an Emergency Fund:
Once you figure the amount you need to save for your emergency fund, make a quick savings plan to save that amount in the next 6 months to a year.
Set up an auto transfer on pay day for that amount to go directly into your emergency fund. That way, you won’t ever see or miss the money.
Keep saving even after you reach your goal. Once you need to use some of the money, you will want to replenish it for the next time you need it.
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When to use an emergency fund:
Actual emergencies that you can use this money for include:
- Medical emergency – We are crazy about our dogs, and when our puppy, Bo, needed emergency surgery, we didn’t hesitate to pay for it. We had the money and we had to help him. You hate for these things to happen, but unfortunately they do. It’s best to be prepared.
- Home repair – NOT renovation or redecorating. If your AC goes out in the middle of summer, you will need to get that repaired. And that’s expensive. Have the money set aside for things like this, so you can take care of it and move on.
- Car repair – NOT a new car and not for any upgrades. If your transmission goes out, you want to have the money to have that repaired and not be struggling to come up with the money. Short note on cars – it’s usually best to spend a little money to keep your old car going than to go for a new, no problem car. Those new cars will still have problems.
- There will be other type of emergencies that you may need to dig into your emergency savings for. Decide with your spouse what types of emergencies you will use this savings for.
Related Post: 6 Tips to Save for Large Purchases
After you use money from your emergency fund:
If you do have to use some of your emergency savings, be sure to pay that money back.
For example, if you spend $1000 getting your car repaired, you will need to put $1000 back in there for the next emergency. Start transferring a set amount to your emergency savings each payday to slowly build it back up.
Now you know why you need an emergency fund, how to build one, and what to use it for. And that means it is now time for you to take action!
Here’s your 5 action steps:
- Open a separate savings account – this is your emergency fund
- Decide how much you need – 3 to 6 months of living expenses at least
- Set up auto transfers on pay day – straight to the emergency fund account
- Only use the money for true emergencies
- Replace the money you spend
Be prepared the next time there is an emergency. By having some money set aside for these unexpected things, you will be able to stay on budget and take care of what needs taking care of.
I don’t want life’s unexpected moments to wreck your budget and get you off track. You can deal with those moments with your emergency fund and keep going.
Now you know how to build an emergency fund, so go do it!
Grab this free $1000 money saving challenge checklist to start building your emergency fund!
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