You might wonder if there’s a difference between savings and an emergency fund. An emergency fund, similar to a retirement fund or a vacation fund, is savings intended to be used for a specific purpose. As such, your emergency fund should only be used for emergencies, like a necessary repair or medical expenses.
Saving money can be difficult. To prepare for unexpected expenses, we recommend following the four steps below to set up your emergency fund.
Set a goal:
First and foremost, you need to classify what an emergency is to you and how much the average emergency in your life costs. Think back to a time when you desperately needed cash. Did you ask friends or family for a loan? Did you rely on a payday loan or cash advance to get you through it? For some people, an emergency fund may be $1,000 while for others it may be three months’ salary, the amount you set aside should be based on your specific circumstances. Regardless of the size of your emergency fund, start with an attainable goal. Once you reach it, you can set a new goal and continue saving.
Budget for it
To start an emergency fund, you need to establish a means to contribute to that fund to hit the goal you’ve set. You can budget for it just as if it were a phone or utility bill, by contributing the same amount every month to your emergency fund. Depending on your income frequency or how you receive your income, instead of a set amount, you might want to set aside a percentage of your income towards the fund. For example, if you receive commissions on sales, your income will likely vary over time. As a result, you could commit to contributing 10% of your paycheck to your emergency fund each time you get paid.
Set it aside
As previously mentioned, your emergency fund is a type of savings. To reduce your chances of dipping into this fund for something like a vacation or holiday shopping, separate it from other savings. Transfer the emergency fund into a different bank account, or if need be, a piggy bank. Not only will isolating your emergency fund prevent you from spending it, but watching your savings grow can also motivate you not to spend the cash you’ve saved.
Take preventative measures
Some emergencies can be avoided. Keeping up with regular maintenance on your vehicle and driving it safely can help you avoid expensive repairs down the line. During an icy winter, salting your front steps could prevent you from paying for the medical bills associated with a broken arm from a bad fall. Ultimately, to see your savings grow, you should be doing all that you can to avoid situations that could cost you in the long run.
One great way to kick-start an emergency fund is by using a cash windfall such as a bonus or tax refund. Even if you don’t have a lot of money to set aside for your savings, the important thing is to start saving and to do so consistently. For more helpful savings tips, check out MoneyKey’s Money Saving Guide.