Key Takeaways
- A dedicated emergency fund provides financial security, so you can manage unexpected expenses.
- Consistently saving small amounts can build stability over time.
- A good target is to save up to three months’ worth of essential expenses.
- Building an emergency fund starts with understanding your expenses, setting a goal, budgeting, and choosing the right savings account.
Suddenly being faced with an unexpected financial emergency can be jarring, especially if you don’t have any money to spare and need to get a loan from friends or a financial service provider. A broken-down car, a medical emergency, or a sudden loss of income can have devastating impacts on your budget.
Setting up a dedicated emergency fund is one of the most straightforward ways to protect yourself from most unexpected situations. It is easy to start saving, even if you’re just putting a couple of dollars aside each week. Having an emergency savings fund will help you recover faster after unexpected expenses and can also help you reach your financial goals.
Why You Need An Emergency Fund
An emergency fund is money that is set aside, preferably in a savings account or investment fund, that acts as a safety net when you have unexpected financial challenges. Some examples include car repairs, medical expenses, job loss, or replacing lost items, like a stolen smartphone.
Emergency funds can be used to pay for expenses that don’t form part of your daily or monthly budget.
If you find yourself without any savings, then even a small expense that you weren’t planning on can set you back or result in debt. And being in debt is never a good idea, as it can have an impact on your credit score and future financial stability.
Emergency funds should, as the name suggests, be used for emergencies, but they also give you some wiggle room in terms of spending money for fun activities. For example, you can visit eSportsInsider for a list of the best casinos that are alternatives to Stake, where you can use some of your disposable savings to play thousands of casino games. Or you can use your funds to plan a weekend away, treat yourself at a nice restaurant, or finally buy that item you’ve had your eye on for months.
At the end of the day, it is your savings, and you should be able to enjoy them.
How Much Should You Save In Your Emergency Fund?
Determining how much you should have saved up depends on your situation, income, and expenses.
Ideally, you should try to have at least three months of your monthly expenses covered, like your rent or mortgage, loan repayments, groceries, and fuel. With a safety net of three months, you will have enough saved if you suddenly lose your job or have a large expense that needs paying.
If your income fluctuates or you find yourself living paycheck to paycheck, then three months’ savings can feel impossible. You need to set aside as much as you can, since even a few dollars can provide some financial stability in the future.
Step-By-Step Guide To Starting An Emergency Fund From Scratch
There is no single way to start an emergency fund from scratch, as you need to find what works for your budget and situation. However, the steps below can act as guidance to get you started.
1. Determine your monthly expenses
To determine how much you can save, you first need to compare your income and your monthly fixed expenses, as well as your variable expenses.
Fixed expenses include:
- Rent or mortgage repayments
- Insurance payments
- Property taxes
- Car payments
- Student loans
- Internet and phone bills
Variable expenses can be:
- Groceries and dining out
- Utilities
- Transportation
- Clothing and personal care items
By jotting down these, you can see how much you’re spending each month and how much disposable income you have.
2. Set your savings goals
Next, you need to set your savings goals. This is entirely unique from person to person, but you can use your disposable income as a guideline. As mentioned, you should ideally try to have up to three months’ worth of expenses saved up, but even just having half of your monthly expenses saved is a good starting point to overcome any spending shocks.
By seeing how much you earn and spend each month, you should be able to figure out how much you’re willing to set aside while still meeting your variable expenses.
3. Learn to budget
You need to learn how to budget so that you can regularly set money aside to save. You can review your expenses and see where you can cut back in order to save more. A rule of thumb is to set aside around 20% of your income as savings as part of the 50-30-20 rule; however, this depends on which portion of your income goes to your expenses.
- 50% should go to your needs, like your fixed expenses
- 30% should go to your wants
- 20% should go to savings
4. Find the right account type or investment
Saving money in a piggy bank is no longer the way to go. You need to place your funds in an account where it can gain interest and grow. The easiest way to do this is to open a basic savings account or a money market account. These can be linked to your main account, making it easier to transfer funds. You want to be able to access your money as needed; however, it is best to get an account where you have to wait around 24 hours for transactions to be processed, so that you can’t compulsively spend your savings.
If you’re unsure of where to start, talk to a financial advisor.
5. Replenish your emergency fund when needed
Life is full of unwanted surprises, and it is guaranteed that you will have to dip into your emergency fund from time to time. Once you have used your fund, you need to replenish it as soon as you can. To do this, make sure you’re sticking to your budget and keeping your savings goals in mind. Rebuilding your fund should be a priority, so that it will be ready when you next need it.
