How to start an emergency savings fund

Unlike a usual savings account which you use to reach a specific goal, an emergency fund exists to provide a financial cushion for unexpected expenses or financial emergencies. Generally, the emergency savings fund account should be enough to cover between three to six months of living expenses. That may seem like a lot of money to keep in your bank account, but remember that in an emergency, you’ll be happy for any amount of money saved because it will buy you time to find a long-term solution.

Here’s how you can get started.

Whether it’s a car breaking down, an unexpected home repair, or a job loss, life can throw you a curveball when you least expect it. While these situations are challenging, having an emergency fund can help make them a little easier to overcome, at least from a financial perspective. Building an emergency fund can help give you a sense of financial security and confidence. When unplanned expenses do arise, you can tap into that emergency fund before going in debt or needing to change your long-term financial goals.

Your first step should be to calculate the ideal amount to save. In this case, that means enough to maintain a simplified version of your lifestyle. Add up a month’s worth of daily necessities, such as rent or mortgage payments, bills, groceries, and car payments. Exclude expenses you can do without in the case of an emergency, such as new clothes, going out to eat, and other simple luxuries. Once you’ve calculated this number, multiply it by the number of months for which you’d like to plan, generally three to six months.

Remember that this is your ideal amount to save; it shouldn’t stop you from starting your emergency fund with an easier goal to hit. The stash can be used for smaller financial emergencies, such as an unexpected car repair, medical procedure, or travel to attend to a serious family matter. However, the intent is to keep this money set aside for when you need it and replace it as soon as possible if a financial emergency drains it.

When choosing where to stash your emergency savings, consider a place where you’re less likely to dip into the money for other expenses. Here are some ideas for where to stash your funds:

• Separate emergency savings account: The benefit of this option is your money is safe and routine deposits are simple. The only difficulty many face in opening a savings account is not touching the money once it starts to grow. If you feel that this won’t be a strain on your willpower, consider opening a separate savings account.
• Money market account: A money market account is an interest-earning deposit account offered by financial institutions, including banks and credit unions. These accounts typically combine some of the features of both savings accounts and checking accounts. These accounts usually have higher interest rates than traditional savings accounts but may have limitations on the number of withdrawals you make per month.

Next look at your spending habits and find ways to set aside money. You don’t want to wait until there’s a real need for your emergency fund to start building one. By then, it’s too late. Commit to making consistent progress to building your emergency fund, even if it feels small. Below are some suggestions to help you decide what works best for you:

• Automate the process. Set up automatic transfers from your checking account to your savings account. That way, you don’t even have to think about it. This will help you establish consistency and then you can build momentum by increasing the savings transfer amount over time.
• If you receive any unexpected windfalls such as a high tax refund or cash gifts for birthdays or holidays, set aside at least a portion of this for your fund. Transfer the money to emergency fund right away to help avoid spending it on impulsive purchases. 
• For every unnecessary purchase you make, consider adding half the cash value of that purchase to your savings account. Not only will this help your savings grow, it will also make sure that you’re thinking about spending with savings in mind.
• Save your change. Most people hate dealing with loose change, but instead of losing it to the couch cushions, hold onto it. If you invest in a change saver and some coin sleeves, you can easily separate your coins and deposit them at the bank.
• Add money that you’ve already considered spending on other things. This can be as simple as selecting a cheaper menu option at a restaurant instead of your pricier first choice and adding the difference between the two to your savings fund, or taking public transportation instead of a cab and adding the would-be fare to your fund. It can also apply to larger purchases such as new clothes, expensive nights out, and elaborate gifts.

Get creative when deciding how to save. You know your spending habits better than anyone and which tricks work best for your budget.

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