Car repairs, a change in job status, or even a larger-than-usual grocery bill: No matter how carefully you budget, unexpected expenses tend to come up sooner or later. For those situations, it’s important to give yourself a cushion by creating an emergency fund. Read on for some pointers to help you get started.
Top tips for building an emergency fund
- Based on your current budget, figure out your monthly expenses, so you have an idea of what you’d need if your income suddenly stopped. To help map out your expenses, check out the Monthly Budget Breakdown worksheet on page 8 of our free e-book, Financial Basics Made Easy.
- Set a goal. Many emergency funds contain three to six month’s worth of living expenses, but every situation is unique. How much would you need to feel comfortable in the case of a major financial challenge? For some, the answer is a year’s wages, while others are fine with just a few thousand dollars.
- Factor in ongoing expenses like health insurance deductibles and homeowners insurance, as well as one-time expenses like potential car repair funds and food emergency needs.
- Consider using a savings account or certificate for the fund. A savings account has easy access for when those emergencies come up, and you will still earn interest on your money, too. Certificates make for a safe, reliable option for money you don’t need to access regularly; plus, Cobalt offers certificate terms as short as one month.
- See fund building as a marathon, not a sprint. Most likely, it will take time to develop an account to a level where you feel secure. For more savings strategies, check out page 10 of our Financial Basics Made Easy e-book.
- Use the funds for actual emergencies instead of splurge opportunities. It’s better to have a vacation savings account or a separate fund for large purchases rather than using your emergency fund for those expenses.
Have a special savings trick that’s worked for you? Tell us about it in the comments.
Consistency is king.
No matter how much you want to save or how you plan to do so, it’s important to emphasize consistency, according to Crissy Hayes, Vice President of Operations at Cobalt Credit Union. “Setting up a small amount to deposit automatically each month or pay period will ensure you don’t forget to fund your emergency account,” she says.