Advance America: How to Build an Emergency Fund

An emergency fund can help people stay afloat financially in case of a job loss, unexpected medical bill, car accident, emergency travel, or other urgent matter. For those who haven’t started building an emergency fund yet, it may seem difficult to figure out where to start. Luckily, creating one is relatively simple. 
For some, the hardest part to building an emergency fund can be figuring out how much to save. But once someone knows how much they should save up, they just have to set aside the correct amount each month and they can start working toward their savings goal. Below is an explanation of how to calculate an emergency fund and some tips for building up savings as a financial safety net.
How Much to Put in An Emergency Fund
A common rule of thumb is for people to save 3 to 6 months’ worth of essential living expenses in their emergency fund. Those with more family members may lean toward the 6-month mark because they have more people to take care of and cover expenses for.
When building an emergency fund, savers should only put enough away for their needs. Here are some of the bare necessities that can be accounted for when building an emergency fund:
Tips for Building an Emergency Fund
Set a Monthly Goal
The key to reaching that big savings goal is to break it down into smaller, monthly milestones. Savers should look over all their expenses and debts, cut where possible, and then note their remaining income. This is a good number to use for the monthly savings goal. But if it’s hard to save that much each month, savers can start at a smaller monthly goal, since any amount they can put away helps.
Use a Separate High-Yield Savings Account
Emergency funds may lose some value to inflation if they aren’t earning a decent interest rate. Luckily, high-yield savings accounts can pay much more interest than traditional accounts. This can help savers reach their goals faster and even earn a bit of cash on their emergency savings. Plus, if the saver uses some of their funds, the high interest rate makes it easier to replenish the account.
People should open this account separate from their regular savings account to reduce the temptation to spend out of the emergency fund.
Set Up Automatic Transfers
After setting goals and opening a savings account, savers should set up automatic transfers. This way, they won’t have to remember to put money aside and can build up savings without thinking about it.
Additionally, savers should temporarily adjust their direct deposit at work if possible. Many employers let employees direct deposit to two accounts. The saver could have the monthly goal amount deposited automatically to their emergency fund account, making saving more effortless.
Add Irregular Income to the Account
Every penny counts when building an emergency fund. If they can, savers should put any irregular income towards their account, whether it’s a tax refund, spare change, or birthday/holiday gifts. By doing so, they may be able to reach their goal a month or two early.
The Bottom Line
Building an emergency fund can take some time, especially for people with little discretionary income each month. However, the peace of mind is well worth it, even if someone never has to use the fund. The key is for people to know the bare minimum they need to cover the necessities, then strive for that goal as quickly as their budget allows.
Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.
Source: Advance America