Building An Emergency Fund

Hope for the best, but plan for the worst! 

This old adage applies to almost any kind of planning, but it has particular relevance when it comes to your finances. 

According to a study by *Forbes*, more than one in four Americans (28%) have savings below $1,000. This offers very little protection from even a minor emergency. The good news is that building an emergency fund isn’t as hard as you might think, no matter your current financial situation. Whether you start with a small amount or gradually add to it over time, saving consistently will provide peace of mind, knowing you have a plan in place in case disaster strikes. 

What is an emergency fund?

An emergency fund is a readily accessible pool of money, typically held in a savings account, meant to cover unexpected expenses such as car repairs, insurance deductibles, or even a lost cell phone. More serious emergencies, like medical bills or job loss, can also be managed with this fund. It is important to remember that an emergency fund should never replace your retirement or your child's college education savings; those should be separate, planned funds. Most importantly, to fulfill its purpose, the emergency fund should only be used for true “needs,” not “wants.” Dipping into it for non-essential expenses can weaken its ability to protect you when you need it most. 

Where to begin? 

Start with a plan! A common rule of thumb is to set aside enough to cover three to six months of essential living expenses. While you may want to aim higher if you have the means, this is still a solid recommendation. Begin by calculating your current living essentials, such as housing, debt payments, and insurance.

How to get there?

One easy way to start is by setting up an automatic savings plan through your bank. You can instruct the bank to transfer a specific amount from your checking account to your savings account each week or month. If your employer offers direct deposit, you may also be able to have part of your paycheck automatically deposited into your savings account. Even small contributions, like $25 per week or $50 every two weeks, can add up faster than you might think.  

Other ways to boost your emergency fund include:

• Add spare change and unexpected cash. Keep a “rainy day” jar at home for loose change or cash you find in couch cushions, old purses, coat pockets, or even the washer. Once it’s full, deposit it into your savings account. 
• Sell unused items. Organize a garage sale or use an online auction site to sell items you no longer need, and put the proceeds toward your fund. 
• Use your tax refund. If you receive a tax refund from the state or IRS, consider adding some or all of it to your emergency fund. 
• Cut unnecessary expenses. Review your monthly expenses and reduce or cancel services you can live without for a while. Be sure to add the money saved directly to your fund. 
• Pick up extra work. If you're serious about building your fund quickly, consider taking on a seasonal or part-time job with the sole purpose of adding to your emergency savings. 

In summary, whatever approach you take to help you get your emergency fund going, the first step is to get it started, and the sooner the better. The next step, and often the hardest, is to stick with it and stay out of it…until the unexpected happens.  This way you will have planned for the worst and can hope for the best:  if you don't end up needing it, you’ll be on your way to accumulating some wealth and a little more financial peace of mind!