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Emergency Fund: How to Start and Build One Up

If you haven’t built yourself an emergency savings fund, now’s the time to get started. This fund allows you to continue paying your bills if there’s a major unexpected expense without relying on credit or going into debt. Having a fund like this also reduces stress because you know you’ll be covered if life throws you a curve ball.

While there’s a lot to consider when building your emergency savings, the gist is simple:

  • Savings should cover at least three to six months of living expenses. If your job is unstable or if you freelance, try to save even more. In fact, many advisors recommend saving up to nine months of expenses.
  • This fund should be in a liquid account like savings, checking, or money market. This ensures you can access your money quickly and easily should you need it.
  • Saving should be an automatic process. Have your employer direct a certain percentage of each paycheck directly into this savings account. That way, you aren’t tempted to spend money on unnecessary purchases.
  • Save for an emergency fund even if you’re paying down debt.

Whether it’s a health emergency, loss of employment or other unexpected misfortune, a financial crisis can happen to anyone and if it does, you’ll be glad you’ve socked some money away.

What counts as an emergency?

A financial emergency is an unexpected life event that could put you into debt: the car breaks down, you lose your job, your child has a medical emergency, travel expenses for a family emergency—these are good reasons to dip into your rainy day fund. That killer pair of designer stilettos? A last minute vacation to the Caribbean? Not an emergency.

I don’t have any money saved for an emergency. How can I start?

It’s not a bad idea to split your income according to the 50/30/20 rule. 50 percent or less of your monthly income should go toward essentials: rent, utilities, groceries, and transportation to and from work. 30 percent or less should go toward lifestyle expenses like shopping, dining out and entertainment. 20 percent or more should go toward financial priorities: paying off debt and saving. Set aside a little of that 20 percent chunk each month to go into your emergency fund: even $10 counts!

I don't think I'll ever have the discipline to grow that fund every month

The solution to this issue is to automate your contributions. Automatic transfers from your checking to your savings account will take temptation out of the equation. Alternatively, ask your employer to directly deposit your chosen amount into your savings so the money never hits your checking account and tempts you to buy you a pricey new outfit or restaurant meal.

If I’m only putting $10 away each month, it’ll take forever to add up. How can I grow my emergency fund faster?

There are several ways to save faster if you get creative, and they’re the same no matter what financial goals you have in mind.

Before you cut out the small thing you enjoy, take a look at your big monthly expenses, especially your mortgage, auto loan, or credit cards. You may be able to refinance them to save big money on interest and drastically cut the fees you’re paying. Even with less than perfect credit, you could save hundreds or thousands of dollars in a year and put that money right into your rainy day fund.

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