How to Start an Emergency Savings Fund
Car or home repairs, illness, job loss… these are just some of the many circumstances that can happen unexpectedly. Having an emergency savings fund can be very useful for these situations. Here are some pointers on how you can start saving for a rainy day.
How much is enough?
Before you start an emergency fund you should know how much money you’d have to save. The amount will depend on your specific situation. A good start would be to have three to six months worth of income saved. For example, if you make $3,000 per month, you should save between $9,000 and $18,000. This will ensure income for at least 3 months in case of job loss or illness.
Next, determine how much you can save each month. Once you determine that, you’ll know how long it’ll take you to establish your emergency fund. For tips on how to save money refer to Simple Lifestyle Changes Can Lead to Big Savings.
How should I manage my emergency fund?
You should have easy access to your emergency fund, but it shouldn’t be too easy to spend the money. It’s best if you don’t use your regular checking or savings account. Open a savings account just for your emergency fund, an account that doesn’t have a debit card attached to it. This reduces your chances of using your emergency fund for things other than emergencies. Buying a new flat screen TV isn’t an emergency, even if your old TV is broken.
What if I have too much debt?
Lowering your debt is important, but you don’t have to do so before building your emergency fund. You need an emergency fund regardless of your debt. In fact, if you don’t have an emergency fund you could gradually increase your debt. Start by saving at least $1,000 up front and then focus on paying off your debt. Having some savings is better than none at all. So if your water heater needs fixing this winter, it’s better to use your emergency rather than piling on more debt.