Are you a glass half-full type of person? Always assuming that things at your job will work out, your family will stay healthy, and your car will last another decade?
Even if you are an optimist, it’s important to take a tip from the Boy Scouts and be prepared. After all, companies downsize, people get sick, and cars break down. To help navigate those situations, you need money — and you might need it ASAP.
That’s why having an emergency savings fund is important. It keeps you above water when life can make you feel like you’re drowning.
But starting an emergency savings account can feel daunting, especially if you’re repaying student loans or supporting a family. That’s where we come in.
Here’s how to build an emergency savings account while balancing your other financial responsibilities.
Why emergency savings is important
A now-famous study from the Federal Reserve found that about 40% of Americans don’t have $400 in cash on hand in case of emergency.
Do you count yourself as a member of this group? If so, that means if you lose your job or have to pay a surprise hospital bill, you’d have to take out a loan, borrow money from family or friends, rely on a credit card, or sell things to pay your regular expenses — putting you deeper in the proverbial financial hole.
This where an emergency savings account is essential. The idea is that it covers expenses you can’t anticipate, like replacing your brakes when they suddenly go out or paying your rent if you’re unemployed or unable to work. An emergency fund prevents you from having to borrow money or rack up debt at a bad time.
Your emergency savings account should contain at least $1,000. Once you’ve socked that amount away, you should keep saving until you have at least three months’ worth of essential expenses (think: mortgage/rent, food, transportation, utilities) set aside.
Ideally, you’ll continue to build your emergency savings fund until it contains at least six months’ worth of expenses. And if you’re self-employed or a single-income household, it can be wise to stash away even more.
How to implement a savings plan
If you aren’t currently saving, you might feel like you’re unable to start an emergency fund. But it’s important for your financial health to develop and implement an emergency savings plan, even if you’re only able to set aside $10 each month.
To determine how much you can save each month, look at your spending and see how much money you typically have leftover every month. If you’ve been keeping those funds in your regular checking account, transfer them into a separate savings account, like our Online Savings Account.
Keeping your emergency fund separate from your everyday bank account is key. That way, you won’t be tempted to spend it on something that isn’t a true emergency, and you’ll earn a competitive interest rate, too.
If you have very little remaining after you pay your bills, take a look and see if you can eliminate any of your discretionary spending, like eating out, going to concerts, or using rideshare services. Or you could try to increase your income by working overtime or a second job, selling stuff around the house, or starting a side business.
Once you have your emergency fund established, you might want to also consider continuing to pay yourself first by setting up regular, automatic withdrawals from your checking into your savings account. Savings pros know that when you put your savings on auto-pilot, it prioritizes your emergency fund and prevents you from feeling like you’re doing without.
If you have to dip into your emergency fund to pay for something (and it’s likely you will have to do so at some point), don’t beat yourself up. Instead, be diligent with your savings until you replenish your account with the funds you withdrew.
Start building your emergency savings account
Having an emergency savings account doesn’t make you a pessimist — it means that you’re prepared when it comes to your finances. You might not be able to fully fund it overnight, but the sooner you start, the better. Once you do, your financial outlook is definitely glass half-full.
Ready to start your emergency savings account?