How to Build an Emergency Fund
You never know when an unforeseen financial situation or expense can occur, such as losing your job or needing a car repair. With an emergency fund, you can cover these types of expenses and avoid financial hardship. Find out what emergency funds are and how you can build one so that you can be prepared for any unexpected situation.
What is an Emergency Fund?
An emergency fund is a pool of money you can pull from when you face an unforeseen expense, like a surprise medical bill or leaky roof that you never saw coming. An emergency savings fund may also help you in the event of job loss or a sudden income decrease. You can count on this fund when you’re in a financial downturn and are struggling to pay the bills.
Why Do I Need an Emergency Fund?
Emergency funds offer an immediate way to cover unexpected expenses. If you have one, you may be able to avoid high-interest loans and a cycle of debt. Here are a few other reasons you may benefit from an emergency savings fund.
You’re Living Off One Income
If you only have one source of income, an emergency fund can give you some much-needed peace of mind. You can use it to help you get through a job loss or illness that makes it difficult for you to pay your monthly bills.
You’re Self Employed or Own a Business
As a self-employed individual or business owner, you won’t be able to collect unemployment benefits. With an emergency savings fund in place, however, you can protect yourself financially in the event that you lose your job or earn less money than usual.
You’re a Homeowner
When you own a home, you have to pay for all maintenance and repair costs. Since your heater may stop working or your basement could flood at any time, an emergency fund is essential. Having a savings fund to cover repairs can make home upkeep a far less stressful experience.
How Much Money Should I Have in My Emergency Fund?
“How big should an emergency fund be?” is a common question. Most experts recommend an emergency fund should cover 3 to 6 months’ worth of living expenses, but any amount can help. If you are only able to put one thousand dollars into your emergency savings fund, for example, having access to this money is better than having no extra cash.
If you’re the sole earner in your household, have an irregular income, or support a family, you should have more saved than a single individual or someone with multiple sources of income.
Where Do I Put My Emergency Fund?
You should have a dedicated spot for your emergency fund. Ideally, you should place it in a high-yield savings account. A high-yield savings account is an ideal place for this fund because it tends to come with a higher interest rate and less fees than a traditional savings account. No matter where you decide to keep your emergency fund, make sure you can access it quickly and easily.
How to Build an Emergency Fund
There are many ways you can build an emergency savings fund. Start as soon as possible with these steps.
Calculate How Much Money You’ll Need
Take a close look at your monthly bills and expenses. Determine how much money you spend on all of them in a single month. Multiply this number by three, four, five, or six, depending on how large of an emergency fund you’d like. The answer you come up with will give you a figure to aim for.
Make a Budget
A budget is a spending plan that considers your income and expenses. It can help you take control of your money and ensure that you spend it wisely. With the envelope budget, for example, you can physically dedicate set amounts of cash into envelopes for spending categories like gas and groceries. An envelope budget can prevent overspending and help you save extra money each month for your emergency fund.
Another option is the zero-sum budget, in which you choose a “job” for every dollar you earn. It can force you to put some money into your emergency fund savings, just like your other essential expenses.
Cut Back on Expenses
Chances are you’re spending more money than you need to. Look at your expenses and figure out how you can cut back. Maybe you don’t need your gym membership you rarely use, or you can prepare meals at home instead of dining out. Get creative and reduce or get rid of as many expenses as possible.
Pay Down Your Debt
The more you spend on your car loan, student loan, or other debts, the less you’ll have to allocate toward your emergency fund. Focus on paying down your debt so you can save more cash for emergencies. If you’re struggling with debt, get a side job, sell items online, or get a 0% balance transfer credit card to help you out.
Use Employer Matches
To promote emergency savings, your employer may offer matching funds or payroll deductions. You can use these options to help you build your emergency fund. Find out if your employer offers any of these perks and take advantage of them if they do.
What to Do If You Don't Have an Emergency Fund
If you don’t have an emergency fund to cover an immediate expense, don't worry. Advance America is here to help. We offer emergency loans such as payday loans and online loans that you can apply for from the comfort of your own home or stop by one of our 1200+ nationwide locations. Upon approval, you may be able to receive the funds on-the-spot in store or have money deposited to your bank account as soon as 24 hours.