Setting up Your Emergency Fund
5 Steps to Jump Start Your Emergency Fund
Bad things happen to all of us – a health scare, an unexpected job lay-off, a blown transmission on a car that’s not under warranty. When life throws you a curveball, will you have enough of a cushion to absorb it?
As a rule of thumb, financial advisors suggest having an emergency fund with six months’ worth of living expenses in the bank to cover those unexpected setbacks. And while the thought of saving money in an emergency fund on top of all the other demands in your budget may be daunting, here are five simple steps to get you started.
- Set a goal. Deciding how much you should set aside depends on your situation and needs. If you’re single or the sole breadwinner of your family, you should aim to have enough to cover six months of living expenses. Couples with two working people might need less. Do you have kids or dependents? Plan to set aside more. No matter what amount you decide on, start small by giving yourself a weekly goal. Even if it’s $20 a week, you’ll have $200 in 10 weeks to jumpstart your fund.
- Set up an account. An emergency fund should be separate from a regular checking or savings account, so that you’re not tempted to spend it. However, it needs to be accessible at any time without incurring fees or penalties for an early withdrawal. Finally, your money should work for you, so look for a high-yield savings account that offers around 1.50% APY. Some savings accounts incentivize customers with higher APY for larger balances.
- Automate with direct deposit. Much like setting up automatic contributions from your paycheck to your 401(k), you can set up direct deposits from your checking account to your emergency fund, so that every time you’re paid, money is put into your emergency fund. Direct deposit is a great way to help you meet your goal and setting it up is easier than you might think, especially if your bank has a tool that lets you link your accounts.
- Find other ways to save. Money for your emergency fund doesn’t have to come entirely out of your paycheck. Look for other ways to find money by cutting back on bills and put what you save toward your fund.
- Are you expecting a tax return? Consider earmarking it for your emergency fund.
- What interest rate are you paying on your Credit card interest rates are notoriously high. If you carry a balance on your card, call your bank and ask for a reduced rate, or find a bank that will offer you a lower rate.
- Cut back on monthly bills (Billshark). Every little bit helps. Can you cut back on cable, or find a better rate on your car insurance?
- Evaluate. After six months, take a look at your fund. Have you met your initial goal? If so, can you raise it? How will an increase in savings affect your monthly budget? Using an online personal finance tool is the best way to make informed decisions because it can give you a holistic view of your finances today as well as projections for the future.