3 Steps on How to Start a Robust Emergency Fund

What is considered an emergency in your life? Do you have an emergency fund to prepare for it?

For most, it would commonly be an accident or medical emergency. But even if it is “commonly expected” – a lot of people don’t or can’t prepare for it. 

A 2022 Bankrate survey found that only 44% of Americans would be able to cover a $1000 emergency from their savings. The same survey stats that 22% of all American adults do not have emergency savings at all.

Furthermore, respondents say rising inflation is causing them to save less for unplanned expenses. That is a concerning statistic. 

It’s easy to dismiss this and deal with it tomorrow, but we’re all affected by the inflation and changes in employment – which means you’re slowly putting yourself in danger too.

You cannot predict what will happen in life, you can only plan for it. Financial stability is a prized possession and peace of mind. Hence, an emergency fund!

What is an Emergency Fund?

An emergency fund is a savings buffer with money set aside to pay for large, unexpected expenses, such as:

• Home-appliance repair or replacement.
• Accidents.
• Unemployment.
• Major car fixes.
• Unforeseen medical expenses.

Why Do You Need an Emergency Fund?

It’s better to have it and not need it, then to need it and not have it. 

If you ever encounter an emergency in life (I pray you will never) – that alone is stressful enough.

Immediately, you’ll be dealing with the emotional and physical stress that’s demanded of you. That will be lessened when you don’t have to worry about how to pay for it. 

Rather than spending time and energy scrambling, having an emergency fund has the flexibility for you to make choices out of your best interest.

You’re not going to make rushed decisions based on desperation (eg. high-interest loans). 

Especially in the wake of COVID, we have learned a few things: company loyalty is a thing of the past, and emergencies can happen at the worst possible moment. 

Money set aside specifically for the unexpected is a necessity, peace of mind, and a part of any good financial strategy. 

How to Build An Emergency Fund?

1. Crunch the Numbers

Calculate the amount you want to save by first knowing how much you spend each month. This includes all mortgage payments or rent, utilities, groceries and other recurring bills. 

This is not a one size fits all, we’re determining the right number for you.

The amount may have to be adjusted based upon how many people are in your household. If you’re coming from a dual-income household, you might feel more secure with just 3 months of emergency funds. 

If you were a single income earner, a good rule of thumb is to have 3-6 months of household expenses saved up. If you were to face a job loss, for instance, having six months of expenses will give you half a year’s time to find new employment without financial strain.

2. Start Small with a Monthly target

Even if that number is a little intimidating – don’t be discouraged. It’s okay to adjust to a level that’s right for you.

Either it’s $50 or $100 per week, per month, or per pay-check – the goal is habit. We know life is dynamic, so are your finances. Sometimes you can even expect a bonus, a promotion, a small increase in income from your side-hustles. In such case, revisit your monthly target and adjust accordingly.

Even better if you can automate the saving process via your work place or bank. And if you do get that sudden increase, resist splurging too much and contribute bigger to your debt or emergency fund that month. You’ll reach your goals even faster! =)

Successful saving is all about the habit.

3. Choose the Right Home for your fund

It’s better practice to keep your emergency fund separate from your day-to-day checking account. We don’t want to get it mixed up with your day-to-day transactions.

While the primary purpose of an emergency fund is not investment, it doesn’t mean your money should sit idle. By placing your emergency fund in a high-interest savings account, you allow it to grow over time. Even if the interest rate is modest, over months and years, this can accumulate to a significant amount, further fattening your financial safety net.

Lastly, keep your emergency funds in a different bank all together.

Accessing the money should be hard enough to not mix with your everyday banking but liquid and easy enough to access when you need it. 

Emergencies do not discriminate. You are not exempt.

Should I pay off Debt first?

Which is a greater priority for you right now?

While it makes more sense to do one before the other, the truth is unexpected expenses won’t wait for you. It’s better to have a buffer – no matter how small – than none at all.

One of the primary reasons people fall into a reoccurring debt cycle is because of the lack of safety net. Knowing you have the financial cushion, keeps you away from resorting to debt to pay of the unexpected.

Simultaneously, debt usually have reoccurring high-interest. Everyday that you are owing someone, it is costing you money. What you are saving in your emergency fund can be cancelled out with the high-interest.

Consider setting yourself a modest goal, and the excess contributed to your debt. After clearing the debt, you can then boost your emergency fund contributions and aim for a higher target.

It’s better to have a cushion, then not at all.

Related Reads:
How to Get Out of Debt – Don’t Panic
11 Steps to Break Free from the Paycheck-to-Paycheck Cycle

Key Takeaways

• In the words of Warren Buffett, “Do not save what is left after spending, but spend what is left after saving.” An emergency fund embodies this principle. 
• It’s better to prepare for the unexpected – to have an emergency fund and not need it, then need it and now have it. 
• Start saving small but be consistent; replenish and readjust accordingly
• A good rule of thumb is to save 3-6 months of expenses before adjusting according to your needs. 
• Separate your emergency fund from your day-to-day checking account to resist temptation. 
• You’re not just saving money; you’re saving peace of mind. 

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