Guide to Building an Emergency Fund

By Jennifer Noble | May 01, 2017

An emergency savings account may be one of the best financial resources available to you. This is because an emergency fund is often used to pay for unexpected expenses, such as the deductible on your car insurance after an accident or a trip to the emergency room. These and other related events can and do happen from time to time, and your emergency fund gives you a way to pay for them without having to take on debt. You can easily establish and grow your emergency fund by following a few helpful tips.


Choose the Right Savings Account

One of the first steps you should take when preparing an emergency fund is to research savings account options. Start by reviewing the details on savings accounts at your primary financial institution, but explore other banks and credit unions if necessary. Ideally, your savings account will have no or minimal fees and free account transfers. If you have your checking and savings account at the same bank or credit union, you can typically make immediate account transfers. This can be incredibly beneficial when you are dealing with an emergency situation and need access to your savings funds immediately.


Determine Your Goal

Many people wonder how much money they should have in an emergency fund. Some experts state that you need three to six months’ worth of your expenses in a savings account, and others state that you need much more than this. The reality is that you need to have an amount that you are comfortable with, but it is smart to consider worst-case scenarios. For example, if your house burned to the ground, you would need to pay your house insurance deductible. Therefore, you need at least this much in your savings account. If you lost your job, it may take several months to find a new job. Therefore, you may need a few months’ worth of your expenses in your savings account.


Adjust Your Budget

If you have not currently been saving money on a regular basis, you may need to adjust your budget so that you have funds available to do so. One idea is to consolidate your debts to a fixed term loan with a low interest rate. This may create more affordable debt payments. You can also shop around for lower insurance premiums, switch from cable to Internet-based TV and more. Ideally, you will free up a sizable amount of money that you can regularly contribute to your savings account.


Make Savings Automatic

It is easy to forget about transferring money to your savings account regularly, and it is also easy to overspend and not have money left to save. You need to strategize your savings habits to overcome these challenges. Setting up an automated bank transfer that pulls money from your checking account into your savings account is a smart idea. It may be best to set up a recurring transfer of funds on the day you normally get paid. This way, the funds are transferred before you have time to spend them on frivolous things.


Save Windfalls, Refunds and Bonuses

You may need to dip into your savings account periodically, and this means that your account balance will go up and down. Some people stress out about this, but keep in mind that your savings account balance is meant to be used for necessary things. For example, if you need to cover a budget shortage one month, it is better to use your savings money than to take on debt or to pay your bills late. A great way to keep your balance up when dipping into it from time to time is to save your refunds, windfalls and bonuses. This may include holiday or birthday gift money, tax refunds, work bonuses, rebates on purchases and more.


Saving money on a regular basis can help you to avoid taking on debt and may be instrumental in keeping your credit rating high. This is because you are less likely to pay bills late if you have extra funds on hand to cover a financial shortage. In fact, having a solid balance in your savings account is a pillar of financial health. Once your savings account is fully funded, you can continue on with your regular savings habit to fund a stock account or to purchase other financial assets. As you can see, this can help you to enjoy great financial security in the years to come. Walk through these initial steps to get started saving money regularly.

 

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