How To Save For An Emergency Fund Properly

Emergency funds have been around for a long time. But even now, building one for yourself or your family is more important than ever.

Setting money aside for emergencies will give you peace of mind when unforeseen circumstances arise.

Don’t be like most Americans who cannot cover a $1000 emergency. This article will teach you everything you need to know to handle your emergency savings properly.

What Is An Emergency Fund? Definition.

Two jars with coins and an emergency fund blackboard

An emergency fund is money you save up in the form of cash or a separate bank account to cover unexpected emergencies.

This money is only used for events such as expensive car repairs, medical expenses, or if you lost your job.

It is important to research what you consider an emergency, and it is just as important to know doesn’t count as an emergency.

Also called a rainy day fund, this cash or account will help cover stuff you never saw coming. This will help you stay on track with other goals and your mind knowing you got your own back.

Why do you Need It?

  • Peace of mind. You never know what the future holds. One thing you can be sure though is that there are always emergencies you did not see coming.
  • No time wasted. When unexpected events happen, it can take a lot of your time to resolve these issues. Having cash aside will prevent this.
  • Stay debt-free. Having a safe fund will keep you from using a credit card to pay for emergencies. Take that high-interest rate!
  • Shows financial responsibility. Every financially responsible person has one. Because it shows that you actually plan ahead, this is a very attractive quality.

How Much Should I Save?

We recommend about $500 in cash for your initial emergency fund. This is probably a lot less than what most other blogs recommend.

The reason is that most small emergencies can be covered with this amount.

Saving money for an emergency fund can be challenging, it is important to know when to wait at least 30 days before making a purchase.

Are there other reasons to keep only $500 as an emergency fund?

Yes, we mentioned this is only your initial amount. We believe if you can save $500, you can save $5000, which is about 3 to 6 months of living expenses.

Many people don’t know that the average car emergency is about $500 to $600.

Once you have this small amount, will you not be more motivated to continue saving even more? We think so; the hardest part is to get started.

If you need help saving money, you can read our post about saving $6000 in six months.

How Do I Build An Emergency Fund?

Here’s how to build your own emergency fund:

1. Write it Down

If you don’t write it down, it’s as if it never exists. Even if you only write down the amount in a notepad or your cell phone.

2. Save A Little Every Month.

$500 is not a lot of money, that is the reason we chose this number.

If you save $100 every month, which is only $25 per week. You should have your fully funded beginner emergency fund in 5 months.

You may have to adjust this amount based on inflation. But right now, we are sticking to $500.

There is no reason to take longer than this. If you cannot save this amount, then look at how much you are making; you may have to ask for a raise or find a better-paying job. You are worth it.

3. Celebrate When You Have A Fully-Funded Emergency Fund

The best part about saving for an emergency fund is to reward yourself. Remember, this is not for punishment. It’s something to be proud of.

Once you have all the cash, reward yourself with something small. Perhaps going out for a meal or asking for a day off to do whatever you want.

Should you Keep your Emergency Fund In Cash Or In The Bank?

Keeping your emergency fund in cash or the bank depends on the type of person you are.

If you have shown discipline in the past, keep it in cash in a secure place in your home.

This assumes you have a home where you can trust your money is safe.

Keeping the money in cash makes it easier to spend it only when emergencies arise.

Open up a checking account if you feel like having the money in your house will be too much temptation.

Having it in a checking account in the bank is also a good idea if your home environment is not trustworthy.

What Are Some Expenses I Can Use My Emergency Fund For?

Life can throw some curveballs at you, and knowing when to use your emergency money is important. It’s also important to know how to save money when times are tough.

Here are some examples of emergency expenses:

  • Car breaking down
  • The air conditioner breaks down
  • Broken tooth
  • Losing your job
  • Co-payments for medical emergencies
  • Prescription medicines you were not expecting
  • Veterinary bill for a pet
  • Funeral expenses

Emergency Fund Mistakes

Knowing how much to have for your emergency savings is important. You also have to learn ways to avoid some common mistakes when setting up for a rainy day.

1. Insufficient savings.

Not having enough money can be just as bad as not having any. Many people underestimate the amount they require to cover unexpected expenses.

Think about what emergencies you had in the past ten years and write them down.

Ask friends what emergencies they wish they knew before they happened. This can help you decide how much you need.

2. Using Your Savings For Non-Emergency Events.

You may be tempted to use your emergency savings to pay for things that are non emergencies.

How do you know if it’s an emergency? Usually, an emergency is something urgent that if you failed to act on it, there could be significant consequences, either to your pocket or your health.

3. Failing To Continue Growing Your Emergency Fund.

Remember that $500 amount we recommended at the beginning of the article. Yes, that’s just the initial amount.

Once you have that cash saved up, it is time to continue funding this stash at the same rate that you were saving before.

When do you stop saving for an emergency fund?

Once you have enough to cover 3-6 months of living expenses, this is an amount that only you can calculate since it’s based on your spending habits and monthly expenses.

Can I Use The Emergency Fund To Pay Down Debt?

No. If you have credit card debt or student loan debt, use your job earnings to pay down this kind of debt.

Using your emergency funds to pay down other debt is not ideal, since the amount in your emergency funds should not be more than 3-6 months of living expenses.

If you have high-interest debt, the best thing to do is to focus on earning more or switching to a better-paying job. This will increase your income and help you set new goals, such as long-term debt payments.

Time To Start Your Emergency Fund

After learning all the basics about an emergency fund, now is the time to start saving and get one for yourself.

Saving money is not something fancy, and it is not on the news as much as other topics, but most self-made millionaires are good at saving more than spending.

The sense of security that comes with having a rainy day fund is well worth it. Knowing you have your own back in case of an emergency will keep you focused on your other projects in life.

Anything that life throws your way, you will be ready to tackle. Your emergency fund is all you need.

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