Emergency funds are for the unplanned moments in life – a blown vehicle transmission, a tree falling on your roof or a trip to the emergency room.
Without a rainy day fund to fall back on, these unexpected expenses can leave you in debt. That makes an emergency fund a crucial tool in your financial arsenal.
Yet many Americans do not have sufficient cash reserved for emergencies. According to a recent Wall Street Journal article1, only 37% of Americans have savings they could use to pay for an unexpected expense, like a $500 car repair bill or a $1,000 emergency room visit. Others would find themselves looking for other solutions, like borrowing from friends or family, cutting back on other spending or using a credit card.
If you lack an emergency fund, here are three tips that can help you build one up to preserve your financial security:
1. Figure out how much to save
You should have six months of living expenses saved up, according to MyCreditUnion.gov2, a site run by the National Credit Union Administration.
“When calculating living expenses, it is important to consider all monthly costs and prepare for an unexpected loss of income,” says Amy Larson, a Springleaf branch manager in Addison, IL. "Those monthly expenses include every bill you regularly incur each month, such as the costs for housing, utilities, health, fuel, insurance and groceries."
To calculate how much cash you need to save, multiply your monthly living expenses by six. This way you’ll have enough money for six months.
For instance, if your expenses add up to $4,000 a month on average, you should have around $24,000 stashed away in your rainy day fund.
2. Pick a place to keep it
According to MyMoney.gov3, a site created by the Federal Financial Literacy and Education Commission, the cash you save up should be kept in a federally insured bank or credit union account that is easily accessible.
Larson also recommends that you find an interest-bearing account at a bank or credit union. An interest-bearing account gives you the opportunity to earn a little money on your emergency savings. The more money you save, the more interest you earn.
Before opening any account, read the requirements thoroughly. Some interest-bearing checking accounts may charge fees or require you to use direct deposit or keep a minimum balance in order to earn interest.
Do not overlook the option of using a money market account. “Choose the type of account that gives you the most bang for your buck,” Larson says.
3. Pay yourself first
One of the easiest ways to build your emergency fund is to make regular deposits into an account every month, as reported by MyMoney.gov4.
In other words, treat your emergency savings just like any other expense; it is just another bill you have to pay monthly.
"I recommend taking a percentage of each paycheck and depositing or transferring it to a savings account," says Larson.
Some banks make it easy and allow you to automatically transfer money from your checking account into a designated savings fund.
“And, as a bonus, automatically depositing money into savings each month will help keep your spending in check,” notes Larson. "Just make sure you can still live comfortably without the amount that you deposit into savings. Use your budget strategically to make consistent deposits."
4. Stick to it
No matter how you choose to build an emergency fund, stay committed to your decision. Remember why you created the account and the relief these funds could bring in a time of need. Good luck!