So what is an emergency fund?In a nutshell an emergency fund is an amount of cash that has been set aside to be used when a financial emergency happens so you don’t need to derail your normal life. Financial emergencies can be anything from a health related issues, a layoff, the car breaks down, or the fridge needs to be replaced.
I have to admit that I was blessed to have parents that stressed the importance of savings while I was growing up. So all during my childhood and college years I was socking away a portion of my earnings. Whether it was from my allowance, part-time work or gifts. This helped me to have a decent amount saved when I moved out of my parents house and went out on my own. It’s also helped me since then as I always make sure that I save a portion of paycheck each month. Currently I put about 5% of my monthly paycheck after taxes towards my emergency fund. This doesn’t include contributions to my retirement funds or short-term savings.
How to start an emergency fund
Set a goalFirst you should start with setting a goal for how much you want to save by the end of the year. If you’re just starting out I suggest not over-shooting for something not attainable. Most experts suggest starting with a goal of $1,000. You can always increase this amount later.
After setting your goal you need to figure out how much you’d have to save each month to reach your yearly goal. Having a goal in mind and breaking it down into digestible chunks help to make the goal more attainable and less daunting.
Select a bankNext it’s good to determine where you’re going to stash your emergency fund. Under your mattress or your sock drawer won’t get you the best security or returns you’d get with a savings account.
You should use a savings account that you can easily access, but not one that you tend to draw money from regularly. I’ve found that keeping my everyday and emergency savings accounts separate is a great way to protect my emergency savings being used for non-emergencies.
Personally I’ve found online banks to be a great option for an emergency fund. Online banks tend to not have fees and have higher interest rates which helps your money grow faster. Before signing up for an account make sure you read the fine print as some accounts require high balances in exchange for no fees.
Start to saveNow comes the fun part. How do you save your set amount each month? Here are six ways you can save each month.
1. Set up automatic transfers/payments
Once you know how much you want to save each month, you can set up automatic transfers from your paycheck or regular bank account to your emergency savings account. When I started I did a $25 transfer from the account my paycheck was deposited into my emergency savings account each pay period which was twice a month. I gradually increased the amount to $75 per pay period. I eventually made it to $150 per pay period after a few pay increases.
2. Cut out cable
Yes, turn off your cable. You may not know how much you’re spending until you’re not spending it. I cut out my cable a few years ago when I moved to Florida. That’s saved me about $40 a month before taxes and fees which comes to about $480 a year!
So I can still watch TV I purchased a couple of TV antennas for about $30 each and setup Hulu and Netflix accounts. While there are monthly charges for these they are less than cable and I can turn them on and off when I want.
3. Get a slower Internet speed
I’ve found that may introductory or specially priced Internet packages include the cable or phone company’s fastest speed. Many times it’s a speed you don’t need and costs a lot when the special pricing ends.
I did this several years in an attempt to save more money each month. I called the cable company and downgraded my speed which saved me about $25 a month. I didn’t notice any difference in performance when streaming videos or browsing online, but was able to save about $300 that year.
4. Eat out less
Going out to eat is expensive and you don’t realize how expensive it is until you start to track how you spend each time you eat out. Depending on the time of day and your tastes you could be spending $10-$30 each time you eat out. And if you do it multiple times a week during the month you could be spending hundreds that you could be saving.
Don’t feel that you need to cut eating out completely. I’ve found it best to limit myself to about twice a month. This way I can still go out with friends and treat myself. But if I eat out more than twice one month, I eat out less the next.
5. Shop less
Yes, I said shop less. This pertains to unnecessary purchases like buying those shoes you don’t need, but like. Or buying a knick-knack just because it’s pretty. If it’s something you need, yes, buy it (though I suggest trying to get the best deal you can).
Some things I’ve done to shop less that have worked for me are
- Avoiding home decor or department stores when I don’t need anything from there
- Making lists when I go grocery shopping and sticking to the list
- Ignoring the items in the checkout line
- Unsubscribing to store emails so I don’t see the sales
6. Sell unused items
I’ve made a few hundred dollars a year selling my unused items online or at yard sales. And instead of spending that extra cash, put it towards your emergency fund. When selling items online one thing to watch out for are seller fees for the sites you’re selling your items on. It’s best to use sites that have low or no seller fees.
Disclaimer: I am not a financial expert. All information is based on my own personal experience and research.