Everything You Need to Know about Building an Emergency Fund

Everything You Need to Know about Building an Emergency Fund

At some point, you’ll likely experience an unexpected expense. Whether it is an issue with your car or a medical emergency, you might have to pay out of pocket for expenses you didn’t plan for. For instances such as these, an emergency savings account can be a lifesaver.

Having a well-stocked emergency fund provides security should something happen, as you won’t have to worry about diverting money away from other bills and recurring expenses. While there is no real way to predict the future, it can sometimes feel like emergencies occur at the worst possible time.

Why You Need an Emergency Fund

An emergency fund is different than your regular or personal savings accounts. If you choose, you can combine the two, but it is easier to keep them separate. You don’t want to combine your regular savings and your emergency fund because you risk the possibility of dipping into money that is designated for a specific goal, such as buying a house or planning a dream vacation.

Having an emergency fund is not something that you have to invest in heavily right away. You can start by adding small amounts on a consistent schedule. Add what you can, and the funds will eventually accumulate over time.

Most emergency funds come in handy in case of job loss, medical bills, or other major life changes. Instead of worrying about the financial impact of these situations, you will be able to focus more on finding a solution. Starting and maintaining an emergency fund will also help you avoid putting expenses on a credit card, which can quickly get you into crushing debt.

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Where to Start

The best way to start an emergency fund is by coming up with an initial goal amount. Of course, you can start with a small amount if a big goal seems intimidating. Depending on your situation, some emergencies may be more likely to happen than others, so you can base your starting amount off of what you think you might need, like car repairs or large insurance payments.

By having this fund, you can effectively minimize the chances of going into debt because of emergencies that you don’t have enough cash to cover. An emergency fund will also get you into the habit of saving regularly and teach valuable money management skills. For self-employed people or freelancers with inconsistent cash flow, an emergency fund can serve as a buffer during lean times.

Ways to Build Your Emergency Fund Faster

Being mindful of your spending habits can help you build your emergency fund faster. If you notice that you are barely making ends meet each pay period, take a look at where your money is going. You can easily identify bad spending habits and begin to cut down on unnecessary purchases. The more funds you have available to save, the bigger security net you’ll have. Doing things like changing your due dates on certain bills will help you plan your cash flow throughout the month. At times, financial hardship occurs because you are paying too many things at once.

If setting up automatic transfers from your checking account to your savings is not the most ideal solution for you, other ways to build your fund faster include selling clothes or other items that you no longer use. Even starting a small side business can help jumpstart the process of having that extra financial cushion.

Only Use for True Emergencies

Having self-control and spending rules will be determining factors in how fast you build your emergency fund. For some people who have not identified their spending patterns, having an emergency fund may look like an extra pool of money to be used on things that may not be real emergencies.

Only you can decide what qualifies as a true emergency, so it’s important to think about what circumstances would cause you to tap into your emergency fund (this will help hold you accountable if you try to dip into it when you don’t need to).

If you ever have to deplete your entire emergency fund, the skills you learned from building the first one will help you start over easily. Essentially, as long as you practice self-restraint, you will always be able to rebuild your emergency savings.

Stay Prepared

By starting early, you can set yourself up for success and create an ideal emergency fund. It may not fix everything financial crisis in your life, but it can help soften the blow of the unexpected and create better money management skills that you can use to cultivate financial stability going forward.