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How to Start an Emergency Fund

If something unexpected happens, are you able to cover your expenses? An emergency fund is money you set aside to pay for things like unexpected medical expenses, expensive repairs to your home or car, or unemployment. They are your financial wiggle room, money buffer, and peace of mind.

Sounds like a good idea, right? Well, 56% of Americans can’t cover a $1,000 emergency expenses).1 If you are one of those people, here is how to build one of your own over time in a way that fits your income and budget.

How much should you set aside?

No one can predict the future. But to start, $500 extra cash purely for an emergency is ideal. However, a true emergency fund for the worst of the worst-case scenarios would be enough to cover 3-6 months’ worth of living expenses.

For any sort of savings calculating, here’s a trusty formula:

Your Income – (Rent/Mortgage + Utilities + Travel Expenses + Groceries/Goods) – Debt Payments = Leftover Money to Distribute

That leftover money should be going towards your long-term savings, these type of emergency funds, and other expenses you’d like to save for. 

How to build an emergency fund:

  1. First, determine what is an emergency cost that could arise in your life. For instance, do you depend on your car for work and transportation to the point that a repair could interfere with your income? Focus on the type of emergency that could happen with that and start to set aside those types of expenses. 
  1. Set a monthly savings goal. Get into the habit of saving regularly by making a monthly goal. Often, you can divide your direct deposit to different accounts so that your monthly savings goal is taken care of automatically. 
  1. Save your tax refund. If you are expecting a refund from your taxes, it can be very tempting to spend it right away. Saving it can be an easy way to create your emergency fund in the first place.  
  1. Re-assess as you save. Check-in after a few months to see how much you’re saving and adjust as needed. When you’ve reached a certain savings amount, reconsider your leftover money each month and redirect it towards long-term savings or your other expenses. 

Check out our post to learn more about other financial health and wellness habits.

Where do I save my emergency fund?

Ideally, your emergency account should be separate from the bank account you use daily, so you’re not tempted to dip into your reserves. Just be sure not to tie up your fund in a long-term investment fund. After all, emergencies are usually pretty urgent.

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