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Saving for the Unexpected: How to Start an Emergency Fund

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8 min read.

Do you ever worry about what will happen if the unexpected occurs? It's one of those conversations we often try to avoid, but having an emergency fund in place can bring peace of mind. Building emergency savings comes with challenges; however, there is no better time than now to get prepared for a rainy day.

A recent survey by the US Federal Reserve on Household Well-Being shows that 13% of households could not come up with $400 to pay for an unplanned expense. In an ideal world, the percentage of households financially prepared for a sudden expense would be higher. Sadly, many families are susceptible to major medical bills, divorces, job loss, or even car repairs.

However, there has never been a golden era when all households maintained sufficient savings. The good news is that US households are overall in a better financial position than a decade ago.

In this blog post, we discuss how to build an emergency fund and give tips on how to make it easier to handle essential monthly expenses. From understanding why emergency funds are essential to practical strategies to tackle unexpected expenses, we're here to guide you every step of the way.


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Why do I need an emergency fund?

Life has a way of throwing curveballs when we least expect it. Whether it's a sudden health care expense, a car repair, or unexpected job loss, having an emergency fund acts as a financial cushion that prevents such situations from derailing all your savings' progress.

It provides you with peace of mind, knowing that you're prepared to handle unforeseen expenses without having to rely on credit cards or loans, which can lead to long-term debt.

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The first step towards financial stability is recognizing the need for emergency savings - for every household - regardless of your financial situation.

In the following sections, we'll explore some simple yet effective strategies to help you start your journey toward financial well-being. Just like climbing a mountain, it may seem daunting at first, but every small step you take brings you closer to the peak. So, let's dive in and demystify the process of starting emergency funds!

How big should my emergency fund be?

a person looking at an oversized piggy bank

The size of your emergency fund largely depends on your circumstances. Most financial experts recommend having three to six months' worth of living expenses - in readily available cash. This ensures you have enough to cover essential bills and responsibilities should you face a period of unemployment or unplanned expenses.

However, keep in mind that this is a general guideline and not a one-size-fits-all approach. Other factors such as your job security, health, number of dependents, and existing debt could influence the ideal size of your emergency fund.

For instance, if your income varies from month to month or if you're self-employed, it might be wise to aim for more than six months of expenses. On the other hand, if you have a stable job and low living costs, a smaller savings goal may suffice.

Ultimately, the objective is to create a safety net large enough to give you comfort without causing undue financial stress. Evaluate your situation carefully and adjust your rainy day fund accordingly.

How to start an emergency fund?

a person on top of mountain celebrating a maxed out savings account

Starting an emergency fund might feel overwhelming, but remember, every journey begins with a single step. Here's how to get started:

Start small if you need to

You don't need to amass a significant sum overnight. Begin by setting aside a small portion of your income – even a few dollars a week can add up over time.

Automate your savings

Set up transfers from your checking account to your emergency savings account. This approach ensures you save automatically because it happens seamlessly, without requiring your intervention.

You can set your transfers to coincide with your payday so the money moves before you have a chance to spend it! Automating your savings removes the temptation to skip or reduce the cash you plan to save, making it a reliable way to grow your emergency fund.

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Keep it separate

Keep your emergency fund separate from your day-to-day bank account to avoid the temptation of dipping into it for non-emergency bills.

Consider opening a separate account, such as a high-yield savings account specifically for your emergency money. These accounts often offer higher interest rates than traditional savings accounts, helping your cash grow faster.

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Save unexpected income

Windfalls like a tax refund, bonuses, or an unexpected cash gift are perfect opportunities to boost your savings. Instead of splurging, consider allocating a portion to your fund.

Adjust your budget

Look for areas in your budget where you can cut back and channel those savings into your emergency fund. This might involve reducing discretionary spending on things like dining out or entertainment or finding ways to save on fixed expenses, such as negotiating lower rates on insurance or utilities.

Save enough money while covering essential expenses with the 50/30/20 budgeting rule, or use apps such as Hiatus or BillTrim.

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Increase your income

If you're finding it difficult to save from your current income, look for ways to increase your earnings. This could involve taking on a side job, selling unused items on eBay, or turning a hobby into a source of revenue.

Building an emergency fund is a journey that requires commitment and discipline, but the satisfaction it provides is worth every penny. So, start saving today, and before you know it, you'll have a cash cushion ready to handle life's unexpected expenses.

How can I save more for an emergency fund?

a person making a direct deposit into a piggy bank in the sky

Building your emergency fund is a journey, and these strategies can help you save more effectively:

Make it a priority

Make your emergency fund savings a priority, just like any other monthly costs. Treat the money set aside each month as an essential part of your budget.

Treat your emergency fund contribution as a non-negotiable monthly bill. By prioritizing it, you'll cultivate a saving habit that becomes second nature.

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Gradually increase your savings

As your cash flow improves, gradually increase your monthly contributions. Even small increments can lead to significant growth over time.

Use the Acorns compound interest calculator to see how your money could potentially grow over time with the power of compounding.

Take advantage of offers and rewards programs

Take advantage of offers and rewards programs to quickly build up your emergency fund. Look for cashback programs or sign-up bonuses from banks, unions, and financial institutions that allow you to earn extra money in your savings account.

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Where to keep your emergency savings

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Choosing the right account for your emergency fund is crucial. Consider these options:

Checking account

This is a popular choice for many people due to its accessibility and ease of use. However, checking accounts are often used for daily transactions such as paying bills, purchasing groceries, or making online purchases.

This means it's easy to dip into your savings accidentally if it's stored in the same account as your daily spending money. Additionally, interest rates on these accounts tend to be relatively low, so your money won't grow as much over time as other account types.

Nevertheless, some checking accounts come with no minimum balance requirements or monthly fees, making them a good option if you're just starting with your savings goal.

An emergency fund aims to have money readily available in case of unforeseen expenses, so consider keeping a portion of your emergency fund in your checking account for easy access, while the bulk of it could be in a high-yield savings account or money market account for better returns.

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Money market savings account

Money market accounts often provide higher interest rates compared to traditional checking or savings accounts, allowing your emergency money to grow even more over time. Moreover, MMAs often come with check-writing privileges and a debit card, which can give you easier access to your funds compared to other high-yield savings options.

Just like with a savings account, there are typically limits to the number of transactions you can make each month, but in an emergency, you'd likely not need to make multiple withdrawals. But they often require higher minimum balances than regular savings accounts, so you must ensure you can meet these money market funds requirements to avoid potential fees.

Overall, while MMAs might require a bit more financial commitment upfront, they can offer a great blend of accessibility and growth for your emergency fund.

The FDIC - short for the Federal Deposit Insurance Corporation - insures deposits; examines and supervises financial institutions for safety, soundness, and consumer protection. Check if your bank deposits are protected.

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Low-risk investment account

A low-risk investment account, such as a Certificate of Deposit (CD) or a Treasury Bill, could serve as a viable option for your emergency savings. These types of accounts typically provide higher interest rates than a traditional savings account and, being low-risk, they offer more security.

CDs, for instance, have fixed, guaranteed interest rates for a specific period, allowing your money to grow reliably over time. However, they do come with the caveat of less accessibility, as your money is tied up for the term of the CD, which can range from a few months to several years. Early withdrawal often incurs a penalty, so it's best only to consider this option if you have other readily accessible funds to cover 6 months' worth of expenses.

Treasury bills, on the other hand, are short-term securities issued by the U.S. government. They're considered one of the safest investments and can be easily sold if access to cash is needed, but they do require a larger initial investment than other account types.

As with all financial decisions, evaluate your situation and goals before choosing where to store your emergency savings, and speak to a financial advisor.

The National Credit Union Administration is a Government agency that insures deposits at federally insured credit unions and protects the members who own unions. Deposits are insured up to at least $250,000 per individual depositor.

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Determine your emergency fund goal

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Calculate your monthly expenses and multiply them by the number of months you want to be covered. Adjust this based on your comfort level and financial goals.

-> monthly expenses (ie. $2000) x 6 = emergency fund amount (ie $12,000)

Keep saving after reaching your goal

Once you've hit your emergency fund target, don't stop there. Keep contributing to your savings account for inflation and evolving unplanned expenses.

What about borrowing to cover an emergency?

spiraling staircase illustrating fall fron high interest loans

Relying solely on borrowing can lead to mounting debt. The financial buffer gained from an emergency fund empowers you to pay bills without sinking into financial stress.

At Control All Finances, we're here to support you on your journey to financial security. By establishing an emergency fund, you're taking a proactive step toward a more stable and stress-free future. Remember, every penny saved is a step closer to worry-free living.

Savings Accounts: Where are you at?

Ultimately, starting an emergency fund and getting financially prepared for an unexpected expense should be a priority.

This personal finance blog post has explored the importance of having an emergency savings fund, the challenges that it poses, and helpful strategies for tackling this task. From creating a plan to consult with experts to reaching out to organizations, there are solutions to grow a financial buffer with relative ease.

Additionally, check our Summer Savings eBook filled with more information on how to save big without having to cut too many corners - grab your copy now and get started today.

Where are you on your emergency fund journey? Share your thoughts and experiences in the comments below – we'd love to hear from you!

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No Investment Advice. This article does not provide financial advice and has been prepared without taking into account any person’s investment objectives, situation, or particular needs.

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