Building an emergency fund
See why creating an emergency fund is so important, and how it can protect you when unexpected costs arise.
Life is unpredictable and it will throw you unexpected financial curveballs every now and then.
This is when it's good to have an emergency fund. This is a safety net that can help you cover an unexpected expense without breaking your budget and without having to take on expensive debt. An emergency fund is really just that; money for an emergency. And it’s good to think about it as an additional reserve of money—separate from other long-term savings goals.
A good rule of thumb is to have three to six months of living expenses set aside. Of course, more would be better, but this is a good place to start in terms of an initial savings goal.
Saving for an emergency fund may seem daunting, but taking the first steps to start one can help give you peace of mind.
To figure out how much you'll need, you have to figure out your total necessary expenses each month: rent, car payments, groceries and so on, and then multiply that by the number of months you’d like to have on hand. For this example, let’s use three months—that’s a good goal if you’re just getting started.
So let's say this number is $10,000. The next step is to figure out a reasonable timetable to reach that goal.
If you’d like to reach that goal in two and a half years; you’d need to put away at least $333 a month. If that's too much, $167 a month would get you there in five years.
But the main point is: any money is better than none. Figure out what works in your budget, and build based on that. You can always re-assess in the future to speed up your savings. And remember, small savings are better than nothing. In fact, if you look at where you spend, you may be able to find an easy $30 each week where you could cut back and save. That could add up to over $1,500 a year. And once you get going, finding additional ways to save can get that much easier.
So, where to save? You could just earmark these funds in your everyday bank account, but you also might consider setting up a special account for your emergency fund. This can help you avoid the temptation of dipping into it for non-emergencies, while still keeping it accessible for when you actually need it.
Emergencies are never fun and racking up additional debt to help pay for them can just add to the stress. Creating a safety net for life’s unpredictabilities can give you peace of mind and can help you lay a strong financial foundation that will last you for years to come.