How to start an emergency fund
As the coronavirus pandemic continues, people have recognized the value of having an emergency fund. People have lost their jobs, faced unexpected hospital visits, and more, leaving some struggling to pay bills. Regardless, it’s still crucial to have funds saved in the event of unforeseen circumstances—26% of Americans have no emergency savings, and only 23% have enough to cover six months’ worth of expenses. Follow these tips to help you get started on your emergency fund, so you’re better prepared for the future.
Track your expenses and spending
Before planning how much you should have in your emergency savings, it’s essential to know your monthly expenses. Calculate how much you spend on your rent or mortgage, utilities, and other necessary items. Tracking your spending is tedious, but there are dozens of budgeting apps, like EveryDollar and Wally, to help you estimate your regular spending.
Set your emergency savings goal
After you’ve gauged how much you spend per month, set your goal of how much you want to save. According to CNBC, less than 30% of households have less than $1,000 saved. That isn’t nearly enough to cover costs in the event of a setback, like a trip to the hospital or unemployment. It’s recommended to have at least three to six months’ worth of expenses saved.
Develop a plan
Once you set your savings goal, it’s time to form a plan of action. Decide what you’re going to do to reach your goal—that could be anything from setting aside a certain amount of money each week to cutting back on unnecessary spending. You can set goals all day, but it’s crucial to know exactly how you’ll reach them—otherwise, it’s easy to fall off track.
Put funds in an accessible place
How you save is extremely important, but where you save is just as critical—if not more. To make the most of your money, put your funds into a high-yield savings account that allows you to easily make transfers between accounts. High-yield savings accounts have higher interest rates than traditional savings accounts—sometimes 20 to 25 times more. While you earn more money in the long run, it’s important to consider factors such as initial deposit or minimum balance requirements and interest rates.
Now that you’ve set your financial goals, how you’ll achieve them, and where you’re going to put your funds, it’s time to start saving. One way to help increase your savings is by setting up automatic transfers—you can set an amount to transfer to your savings each week, every two weeks, or each month. Even if it’s only $50, you’ll be surprised at how quickly your savings will grow. Another great way to increase your savings is by setting aside your tax refund. You can set aside all of it or even just a portion—either way, any amount will help get you that much closer to your goal.
Consider what constitutes an emergency
Now that you’ve started to set funds aside, it’s imperative to decide what constitutes an emergency, so you’re only using your emergency fund for its intended use. This could be unexpected hospital visits, car repairs, job loss, or other unanticipated situations. Defining what you consider an emergency is important so you know your emergency fund is used properly, rather than being spent on frivolous things. Remember, it’s not fun money—it’s money you’re setting aside so you know you and your family will be okay should something happen in the future.
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