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What would you do if you lost your job tomorrow? Would you have enough money in the bank to pay your bills while you search for a new job? Or would you have to start swiping your credit cards to pay for things like groceries and other household bills?
Building an emergency fund is one of the most important things you can do to prevent yourself from getting into serious financial trouble. Emergencies do and will happen in your life and you need to be prepared for them.
Wouldn’t you feel much better paying cash when an emergency arises and not having to worry about any interest costs?
Decide Where to Keep It
The first thing you need to figure out when you start building your emergency fund is where you want to put your that money. It should be in a high-interest savings account that is easily accessible.
We have our emergency fund in a savings account which has zero fees and earns interest every year.
Determine How Much to Save
How much you should set aside in your emergency fund will vary for every person. Are you single? Do you have kids? Pets? Do you live with roommates? This all factors into how much money you should be saving.
The recommended amount to save for most people is 3-6 months worth of living expenses. If your family only has one income, 6-12 months is suggested. These living expenses would cover the bare minimum and nothing else. No entertainment, no clothing, no allowances. Only things such as your mortgage or rent, plus hydro, heat and food.
5 Ways to Start Building Your Emergency Fund Now
1. Start Small
Start with an initial goal of $1,000 for emergencies. If you can’t afford to save much every month, that’s okay. The important thing is to save something. Even a savings of $50 a month means you would have $600 by the end of the year, not including what you earn in interest. Once your financial situation starts to improve, you can save more. When you finally hit that $1,000 target, you can evaluate whether that amount makes you feel comfortable or if you should aim to save more.
2. Treat it Like Bill Pay
Have you ever heard the line “pay yourself first”? This is a good time to implement that advice. By treating your emergency fund savings as a monthly bill that must, you are more likely to put the money away instead of spending it.
3. Automate
Consider setting up an automatic transfer with your bank where they will deduct a certain amount of money every month (or week) and put it into your emergency fund. By doing this, you don’t even have to worry about transferring money – the bank will do the work for you!
4. Stash a Tax Refund or Bonus
If you’re fortunate enough to get bonuses at work, don’t spend all of it on wants. Put all (or most of) the money into your emergency fund. You will feel much better knowing that you have money set aside in case of an emergency than you will by purchasing a tangible item. This applies to tax refunds as well.
5. Sell Something
Do you have something in your home that you could do without? Whether it’s a toy your kids no longer play with, a guitar you never use or even a car that you don’t actually need, sell it and put that money into your emergency fund.
Don’t Touch It
The reason you need an emergency fund is that you need to have money available in case of emergency. Don’t spend your emergency savings on things that are not true emergencies.
Keep your money stashed away until a real emergency comes along.
Examples of Real Emergencies:
- Loss Of Employment
- Death in the Family
- Major Car Repair
- Natural Disaster (Flood, Fire)
- Unexpected Dental Work
- Critical Home Repairs (Roof, Electrical)
Building an emergency fund is an important step you need to take in your quest for financial freedom. This is one task you don’t want to skip.
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