Financial literacy: how to start an emergency fund
Whenever I think about an emergency fund, I think about all those experts that say I need six month’s salary in the bank. I don’t know about anyone else, but hearing that when I was first starting out was really intimidating. How was I ever supposed to get to that kind of number?
The good news is that you don’t need a huge amount of money overnight. Rather than getting caught up in the end game, it’s a better idea to just start an emergency fund. Let’s look at ways we can get started without setting ourselves up for failure. Here are five steps for taking on an emergency fund project:
Understand your emergency fund
So, let’s put all that money stuff to the side for a minute and focus on what an emergency fund is all about. To put it simply, it’s about helping you get through tough financial times without incurring a lot of debt. Your car blows a gasket, emergency fund to the rescue! Your computer goes on the fritz, emergency fund saves the day!
Once you wrap your head around the fact that your emergency fund is for you and not for some imaginary financial expert, you’ll probably feel better about it. It’s about you having peace of mind when things go sideways in life.
Set a realistic goal for yourself
Now that we’ve established that it’s your emergency fund, you get to pick the number that helps you get started. Even if that number is $100, $200 or $500, it’s cool because It’s what works for you right now. Finding the right number can be hard to do because it can be tempting to stretch yourself and set an impressive number. Resist temptation! You’ll have more success that way. The biggest key when you start an emergency fund is to begin with a small amount that you can achieve. Then you move forward, continuing to build your fund.
Build a better budget and save more
When you first start an emergency fund, look for ways to cut costs in your own budget. Write down all your expenses so know where you can save some cash without having to sacrifice your way of life first. One less latte and one more packed lunch in a week gets you an extra $20.
Once you have a budget worked out, you can set a number that you can put away weekly, biweekly, or monthly – whatever works for you. Now the magic begins because that extra $20 a week you found starts to grow into the fund you need. Not only that, but if you keep the money in a high-yield account, compound interest can help you build your fund a little faster.
Cut expenses for better results
There are lots of ways to start an emergency fund by cutting expenses, including shopping around for a better rate on your home and auto insurance. You can also cut down on your smartphone’s data plan or negotiate a lower interest rate on your credit cards. The possibilities are endless once you start digging into your finances and contacting your service providers.
Out of sight, out of mind
And finally, when you start an emergency fund, you won’t want it sitting around somewhere obvious. Find a
free savings account offered at a separate bank like Tangerine and set up automatic payments to come out of your main banking account. The goal is to forget that it exists until you need it for a real emergency.
Automating your savings keeps you from the need to remember to set aside the money each month. You can increase the amount you contribute as your financial situation improves.
Your emergency fund can help you take care of unexpected expenses. Start early and save often, and you’ll be in better financial shape for years to come.