An emergency fund is a critical component of any financial plan. It’s a savings account that you can tap into when unexpected expenses arise, such as a car repair or medical bill. Without an emergency fund, you might be forced to turn to high-interest credit cards or loans to cover these costs, which can put you further into debt. That’s why it’s important to start saving for your emergency fund as soon as possible. In this blog post, we’ll outline 11 steps you can take to start building your emergency fund and ensure that you have the financial stability to weather any storm. Let’s get started!
1. Set a Goal for Your Emergency Fund
The natural 1st step in saving for your emergency fund is to set your goal. Under funding it could lead to not being properly prepared for your emergency and overfunding could leave you missing out on gains in other areas of your full portfolio.
That is why it is suggested that you save around 3-6 months of core expenses (housing, transport, utilities, groceries, etc) in a FDIC insured savings account.
If you have a stable job and no current health problems you can probably skew toward the 3 month side while if you really like having that extra cushion then the 6 months is what your goal should be.
Simply take your goal months and times that by the amount of core expenses you have and that is your magic number!
2. Create a Budget
In step 1 we have already determined what are core expenses are. All that is left is to track it and fill out the non essential expenses that make life fun. I personally use 2 different apps for tracking progress. They are Mint and Personal Capital.
I prefer to use Mint for baseline budgeting and Personal Capital for tracking my path to retirement.
Mint is great for my monthly budget and makes it really easy to log my transactions but is not as great for tracking how far you have come and the path you need to take to get there.
That is where Personal Capital comes in. They are fantastic at tracking your net worth and advising if you are on a good path to safely retire.
You can also create a simple Excel sheet by looking at your bank transactions, estimating monthly bills, and seeing what kind of reoccurring payments you currently have set up.
Once you get all of your expenses in, enter your monthly income. This will give you an amount left over. This is where it is all personal preference. Do you love going out and trying new restaurants? Then make sure to leave money in your budget for that. After all, if you have to be miserable and feel like you are missing out on life you probably never stick to your budget and will forget about it after a couple months.
Alright, now that you have entered your “fun” expenses in you have a more realistic number of how much you can save a month. The number may be very low but just remember that every bit you save in your emergency fund is money that will not go on a credit card with insanely high interest rate.
There is also a chance that after entering everything in you have more money you can save than you expected. This could be because you are underestimating how much you spend on take out, uber, drinks, etc. You could have a decent chunk to be able to save but at the end of every month you still come out near $0.
I do not want you to quit doing the things you enjoy, but if you are able to limit them some (1-2 times a week instead of 3-4) then your savings will start to grow very quickly! If you go out 4 times a week and limit it down to 2 times a week that could be an extra 50-100 in your emergency fund.
3. Track to Your Emergency Fund Goal
Your goal is now a tangible number and your budget is in place. Now you can track to your goal. I love having a visual graph that I can check in on month to month to show my progress towards a goal.
I love checking things off a list and maybe you are that kind of person as well. This scratches my itch. I get to see the number getting closer and closer every week and month and get a sense of pride knowing I am getting there.
This can be shown on Mint or Personal Capital. Both have goal trackers that you can utilize to show you progression every step of the way!
4. Automate Your Savings Account
Automating your savings is a huge hack here. If you set up an automatic withdraw from your chekcing to savings it can happen before you even realize it.
If you are worried about your account being overdrawn please do not use this strategy but if you have enough buffer already to set this up it can be a big help.
Most online bank account let you set up rules so that once a week it will transfer whatever amount of money you want. I like using a strategy where it moves over a certain amount every time I get paid.
I personally use Ally and they even have buckets within your savings account. This allows me to save to several goals at the same time. Maybe you have a long term goal of finishing your emergency fund, saving for a down payment on a car, and a new phone.
You can select a percentage and end goal of every bucket. Maybe 50% goes to your emergency fund, 30% towards a down payment, and 20% towards a new phone. You can always move money around in your buckets but I love seeing each of my goals coming closer to fruition every paycheck.
5. How to Cut Back on Expenses
So maybe after we made our budget we realized we spend too much money on food delivery or realize we are spending $200 on steaming services. This is the time to reflect on our purchases.
One of my favorite things to do is rotate streaming services. Do we really need Hulu, Netflix, Disney, and Paramount? And lets not forget about AppleTV. Most of these apps you can cancel at anytime. Because of this, I suggest rotating which ones you pay for.
You can rotate every 6 months or 1 year. It can be a pain but it will save you a fair amount of money if you can limit your services. They will still be there in 6 months to a year for you to binge.
Instead of using a food delivery service multiple times a week maybe splurge on that Saturday morning when you do not feel like cooking. Even driving there can save you a few bucks.
6. Use Credit Cards for Rewards -- Only if You Don't Carry a Balance
This step only applies if you are not currently carrying a balance on your credit cards. Credit card debt can be crippling so if you cannot pay off your balance every month please skip this step.
Now if you can pay off your credit card every month this can also be a nice step. Most credit cards can offer you some type of rewards program.
If cash back is your thing you can usually find a card that will at least give you 2% on all purchases. That can add up very nicely over the course of a year.
If you a frequent flyer maybe getting mileage on all purchase makes you excited. If you use your mileage card all year long maybe you can treat yourself at the end of the year with a free flight somewhere you have always wanted to visit.
Using a credit card can give you a nice little bump in your savings as long as you pay off your balance by the end of the month. A 20+% fee on your balance can ruin months of hard work if you are not able to pay it off.
7. Negotiate your Bills
I absolutely hate negotiating but it can be so worth it in the long run.
Did your introductory price run out on your phone plan? Have a free trial that is now costing you for an app you no longer use? Did your internet price jump recently? Maybe you can get these bills lowered!
I had a Wall Street Journal subscription that when the introductory price ran out the price jumped $25 a month. I called them and got it lowered back to the intro pricing. A few months later I found that AppleNews+ was $10 cheaper than that which included stories from the Wall Street Journal. I cancelled a few days later.
What this step is saying is to analyze what is coming out of your bank account. Is there something that looks more expensive than you remember? Anything you do not recognize? Find a email or number and contact them. For the majority of items, companies would rather lower your cost than lose you as a customer. Take advantage!
8. Take the Free Money
Do you work for a company that offers a 401(k) match? Do you use a brick and mortar savings account that gives you almost 0% intererst?
PLEASE PLEASE PLEASE take free money!!!!!!
Let us imagine you work for a company that offers a 5% match into your 401(k). Let’s also say you make $100k just to make the math easy. If you do not contribute to this you are leaving $5,000 on the table every year! And that does not count the compound interest you are loosing over the course of your career. If your employer is giving you free money and you are able to take it PLEASE DO IT!
Next easy free money is your savings account. If your savings account is not offering at least 2.5-3% then you need to look into a different bank. Under the recommendation tab above I have listed 3 viable online savings accounts that probive at least 3% APR.
9. Is It Time to Ask for That Raise?
It seems like nowadays the only way to get a raise is get a new job. I know a lot of folks who enjoy their work too much to threaten to leave but are unhappy with how much they are getting paid.
Have you had years and years of 2-3% raises without that promise promotion?
It is time to have that one on one with upper management. Put something on your managements calendar now and stress to them that you love the work you are doing but you are not feeling valued.
If you stress this fact and still come up empty I suggest you at least test the waters. There are a lot of companies that would love you have you and pay you fairly for your work.
My main message here is, if you feel like you are being taken advantage of, you probably are…
10. Use Cash Envelopes for Your Budgeting
I do not personally use this method but I have good friends that live by this method. Using cash can alter your spending habits.
Handing over a $50 at dinner does something to you psychologically that using a debit or credit card does not. If this sounds like it would help you from overspending on things you do not need two you can read on.
This method involves getting envelopes for all your items listen in your budget. All of your bills and how much you want to save.
You write on each envelope at the bigging of the month how much money needs to go into it and fill it as you get paid. I have also heard of putting an extra envelope in there for vacations and stuffing all of your extra cash in there. At the end of the year you could really treat yourself to something you would not forget.
11. The Dreaded Side Hustle
I hate side hustles. Hate them. Everywhere I turn is someone telling you to start a side hustle.
If I hate it so much then why did I include it on my list? I think that done right…it can be the right move.
I am not suggesting that you go out and start Doordashing after your 9 hour shift. What I would like to suggest is to turn something you already do or a hobby you enjoy into income.
Maybe you live in an apartment complex and have a dog. You already take your dog on 2 walks a day, maybe you could tempt a couple of neighbors into paying you to take them out.
Do you enjoy playing video games in your downtime? Maybe think about starting a stream– you are going to play anyhow, maybe someone will pay a small fee to watch it!
My best advice for a side hustle is, if you are going to do one, then make it something you enjoy. You probably already have one job you don’t like, try not to compound that if possible.