When your car broke down last week and you had to pay for the repair out-of-pocket, when the medical bill came unexpectedly and you had to find the funds to pay it immediately, when you lost your job unexpectedly – you definitely understand the importance of having an emergency fund. The problem is not in understanding why you should have one. The problem is that you do not know how to create an emergency fund when your salary barely fits for this and next month.
The following guide does not include standard advice that you have probably already heard and tries to offer you an approach that you can apply now starting from a minimum sum of money.
What an emergency fund is (and is not)
An emergency fund is money that is kept in the special account and which is easily accessible only for covering any emergency situation. A true emergency situation is an unexpected, necessary, urgent issue: your car that you need for working is broken; you receive a big medical bill; you have an urgent repair to cover; you lost your job. It is not a holiday trip, it is not money that you will use for treating yourself, it is not Christmas shopping. Having this fund in the mind and in the separate account is a very important step towards succeeding or failing.
Step 1: Set a starter goal, not “ideal” number
Financial guides usually say that you should keep three to six months of expenses saved. When you do not have any savings, it seems like a big unreachable number. Instead of thinking about this number and being discouraged, set the starter goal of keeping $500 to $1,000. This amount will cover most common emergencies: a car repair, vet bill, and repair of some appliances. In addition, you will feel that you make real progress.
Once you achieve this starter goal, you can move further to bigger goal gradually.
Step 2: Open a separate, boring savings account
Do not keep this fund in the account where you keep money for current expenses. Ideally, keep it in a separate account in another bank than the one where you keep your salary. Such an approach will help you to add a small obstacle between you and the emergency fund. If it is not complicated to transfer money between accounts, you will more often spend money of this fund on unnecessary purchases. You should choose the savings account with the absence of monthly fee and the decent interest rate. Online banks often offer significantly higher interest rate than traditional banks.
Step 3: Find money that you do not know that you have
You do not need any windfall to start. Instead, you need regular contributions that you can do. Here is how most people find money that they did not know that they have:
- Review your subscriptions. You probably subscribe to streaming service and apps that you use rarely. In total, you waste $30-$100 per month.
- Use “round-up” method. Some applications automatically round up purchases you make and transfer the remainder to the savings account.
- Change one of your expenses for one month only. Choose the type of expenses (for example, eating in cafes) and move the money into your emergency fund for a month as a trial period.
- Sell things that you do not need. Your old electronics, clothes, and furniture can quickly give you the first deposit.
Step 4: Automate the process so you do not have to decide anymore
Willpower runs out, but automation does not. Arrange an automatic transfer of $10-$25 per check to your emergency fund account. The sum is not important, but the regularity is crucial. Even $20 per each payday means that in a year you save about $500 without thinking.
If your salary is not fixed, for example, if you have an irregular job as freelancer or if you work for hourly pay with changing shifts, you can set the automatic transferring of the percentage of your pay or manually transfer the money each time you get a pay.
Step 5: Use windfalls wisely
Your tax refund, bonus at work, cash gifts, and rebates are the easiest way to fill the emergency fund quickly. These sums were not supposed to be spent on usual expenses, so it will be easier for you to put it in the savings account. Try to keep the biggest part of this money or even all of it in the savings account.
Step 6: Do not invest it
It is tempting to put money in the stock market for getting better results, but such an approach contradicts the meaning of having an emergency fund. Your car can break down even if the stock market has bad condition. You should not sell your investments for the sake of covering the cost of repair. Keep your money in cash in the easily accessible account.
Step 7: Return money after you used it
Using your emergency fund for the actual emergency situation is not a failure; it is its function. But you should rebuild the fund after spending money on any kind of emergency. You can treat replenishment of the fund as a temporary priority as minimum debt payment.
A realistic example
Let us assume that you can keep only $15 weekly. It means that it will be about $60 per month or about $780 per year. It means that in a few months you will reach the starter goal of $500-$1,000, even with two tax refunds that you will get.
