How to Start and Maintain an Emergency Fund

You might have seen our last Tuesday's Tip about having a rainy day fund. Most people agree it's a good idea to have an emergency plan in place, but they are uncertain about starting. How much do I need to save? How do I get started? Here are three steps to help you get your emergency fund started.

1) Set your savings goal

The first step in any savings plan is to determine how much

you want to save and how quickly you want to set that money aside. Be realistic. Goals are great and can be motivating, but if they aren't realistic then they will only discourage you. Generally, experts advise keeping between three and six months' worth of living expenses set aside in your emergency fund. Once you've calculated that amount, (including rent/mortgage, student loans, food, utilities, entertainment, fuel, etc.) decide on a reasonable time frame for achieving your goal. Keep your income level in mind when deciding this. For example, if you want to save $9,000, a time frame of three months would mean putting $3,000 into the fund every month. For most households, that is not realistic. A better time frame would be at least eight or nine months, probably much longer. 

2) Start small. 

Whether your goal is to set aside $1,000 or $10,000, it all starts with that first dollar saved. If you're just starting your emergency fund, even finding $25 extra each month to put away can increase your confidence. Setting up an automatic transfer with your bank can help you stay consistent. You can start by transferring $25 each month from your checking account to your savings account. Then, start adding any budget surpluses and the amount you saved by cutting your expenses. That way, each month you're saving at least your minimum; anything in addition to that is a bonus to yourself.

3) Finding the extra cash. 

This is the most difficult part for most people. Sometimes, finding the money to deposit into your emergency fund account each month will be a struggle. If you can't tighten up the monthly budget any more, consider adding profits from a garage sale, selling a few things online (Craigslist and Facebook are great for this!), or picking up a few more hours. Do you have a hobby such as photography, woodworking, or gardening? Try selling your projects at a local farmers market or gift shop, or online. Put the extra income straight into savings. Another strategy is to start taking a bagged lunch to work and/or school and cooking your meals at home instead of ordering pizza or heading out. Put the money that you would have spent directly into your emergency fund so you're not tempted to spend it elsewhere. Save on your morning coffee by brewing at home. Even if it's only $2.00 each day on your way to work, that's $42 that could be added to your emergency fund at the end of each month.

Taking these three steps will help you start and grow your emergency fund, giving you peace of mind as you prepare for the unexpected.