Life has a funny way of throwing unanticipated emergencies in your path. Whether it's a flat tire, a trip to the emergency room, or a leak in the ceiling, many of these unexpected situations can be expensive. And a great way to protect yourself from going into debt to cover an emergency is by building up a cash reserve in an emergency fund. Here's what you need to know about how emergency funds work and how to save money for one.
What is an emergency fund?
An emergency fund is a savings account that helps you cover unanticipated emergency expenses. The point of an emergency fund is so you'll have money to cover an emergency expense and won't need to put yourself in debt to pay for it using a credit card or high-interest loan.
The money you set aside is typically reserved for events like unemployment, car repairs, medical expenses, or emergency house repairs. Experts recommend saving three to six months' worth of living expenses in your emergency fund. But everyone needs to start somewhere. Even saving a few hundred dollars can be enough to put a barrier that stops you from going into debt to cover an expense.
Ways to Save for Your Emergency Fund
Set a goal
Goal setting is a great way to motivate yourself to save. When you have a clear finish line in mind, it makes it easier to save, as every dollar you put away puts you a step closer to achieving your goal. First, start with an achievable goal in mind, say $500 or $1,000. Then, decide on a reasonable monthly contribution to help you hit that goal.
Pay yourself first
Waiting until the end of the month to set money aside often means there's none to spare. But if you can take a bit of money off the top of your paycheck and put it directly into the emergency fund, you're more likely to save. Start by taking a small amount, like $10, and transferring it to your savings account on your payday. Once you get used to that, you can work up toward putting a greater dollar amount in savings from each paycheck.
Start small and build
Saving as little as $20 a month toward an emergency fund can go a long way. As you progress, bump up your savings a little each month. If you can afford to put in $20 without noticing, try $25 next month and keep increasing from there.
Keep it in a separate bank account
You'll want to keep your emergency fund easily accessible. But if you keep emergency savings in your regular checking account, you may be tempted to use it. Instead, consider opening a dedicated savings account to house your emergency fund as you work to build it up.
Some people also find success in using an online-only bank to hold an emergency fund. That way, it's more challenging to get to the funds for everyday expenses, but they're still there in case of an emergency.
Save unexpected money
Sudden cash windfalls like a tax refund, birthday gift, or bonus at work can boost your emergency fund without you feeling it coming from your paycheck. If you put the money toward your savings right when you get it, you won't be as tempted to spend it.
The bottom line
Nobody is immune from life's emergencies. But the one way to protect yourself is by saving money for your emergency fund. Use strategies like setting a clear goal, starting small, and saving unexpected money to make saving seem effortless and be prepared for whatever life throws your way.
Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.
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Original Source: How to Save Money for Your Emergency Fund
