Establishing an emergency fund is likely something you know you should do. Setting aside the funds to make it happen, however, can be another story, especially with the ever-rising costs of living and other savings priorities.
But if you ever find yourself in a pinch — whether it be from a surprise medical bill or a pricey but nonnegotiable car repair — you will be very glad to have an emergency fund stashed away. You may otherwise find yourself taking on debt to cover the cost, which will just add another worry to your financial plate. Here are three tips to help you start building.
1. Figure out your target number
Savings goals are often easier to meet the more concrete they are. If you just have a vague idea in mind, like saving enough money to cover a potential job loss, it can be trickier to accomplish because there is no clear end goal.
While you may hear some experts “recommend you save three to six months’ worth of expenses for emergencies,” in truth, the “amount you need for emergency savings can vary based on your own financial situation,” said Bankrate. You’ll want to consider “how stable your income is, your level of risk tolerance and whether you have children or other dependents,” all of which will influence what an appropriate buffer is for you. Generally, though, you want to define your typical monthly costs (making a budget is a good way to figure this out), then aim to be able to cover those from your emergency fund at least a few times over.
2. Have a plan for how you will fund it
Just as important as knowing how much you need to save is figuring out how you will achieve that balance. But “instead of focusing on one large savings goal, focus on smaller, attainable monthly goals,” as “this can help you keep the habit of saving regularly and make the overall task less daunting,” said NerdWallet. Maybe you aim to set aside a certain amount each month, such as $50 from every paycheck. Automating that amount to move from checking to savings each time your paycheck hits can make it that much easier to do consistently and regularly.
Do not overlook the impact of any financial windfalls, either. Even just putting a portion of your tax refund or annual bonus into your emergency fund can give it a good boost.
3. Be strategic about where you keep your money
Where you keep your emergency fund parked and waiting can make a difference in how quickly it grows. But “while investing your money can bring higher returns, it can also come with losses, especially if you have to sell quickly in the event of an emergency,” said Experian. Instead, keep your emergency fund in a liquid account — meaning one that is easily accessible when you need it — but that still earns some interest. A high-yield savings account is often an ideal candidate, as you will earn interest above the low rates that standard savings accounts offer but still be able to easily access your money in case of, well, an emergency.