How to Create an Emergency Fund
An emergency fund is a very essential part of your financial well-being. It acts as an air-bag would for a car. If you have some kind of unexpected crash in your expenses you can deploy your emergency fund to keep your finances alive! So, how do you actually start and keep an emergency fund in practical terms? This post will give you a step by step guide to safeguarding your hard-earned money.
Step 1: Open up a Savings Account
Since your emergency fund is money that is set aside for a rainy day, it can spend that time accruing interest! Savings accounts will give you a small interest rate varying between 0.75% to 1%. It will probably only net a few dollars each month but it is basically free money! I personally use a Capital One 360 savings account that earns 0.75% APY (annual percentage yield).
Step 2: Transfer Money into Your New Account
Now we can get to building up your emergency fund. Many savings accounts will only require $1 to open them. The amount of money you initially transfer over to your savings account should be whatever you are comfortable with. Make sure to not deplete your checking account or transfer too much from it since the money in your savings account will take a few days to become available when you need it. I would suggest leaving enough funds in your checking to cover 1 month’s expenses. If you are unsure what 1 month’s expenses looks like then check out my 3 part series on How to Build a Budget!
Step 3: Set up Regular Transfers
Your first goal should be to save up $1000 into your emergency fund. Start by figuring out how much you can afford to save each month in your budget. Go to your savings account website and set up a regular transfer of X amount for one day each month. Try to choose a day of the month that you don’t have many bill payments so your money distribution is more even. As an example, I put away $70 on the 15th of each month into my own emergency fund.
Step 4: Save up 6 months of Expenses
Your final goal should be to save enough money in your emergency fund to account for 6 months of necessary expenses. If you have your budget at the ready you can easily ballpark this number by cutting out extraneous or secondary expenses for one month and multiplying the result by 6. By doing this, if something unexpected occurs like losing your job, you have a lot of time to find a new source of income while you rely on your emergency fund.
What are some ways you have used an emergency fund? Do you have any tips for maximizing that fund? Let us know in the comments!