How to create an emergency savings account
Financial advisors and planners all across the country will tell you that no matter what, you need an emergency savings fund. Life can throw lots of crazy things at you, but having even just a little bit saved up can really help with that bump in the road.
It doesn’t matter how good your job is, how healthy you are or how well you drive; bad things happen to good people. In order to face these obstacles and not let them become financial disasters, you need to create an emergency savings fund.
How much should I save for an emergency fund?
Since you cannot see into the future, it is hard to know exactly how much to save up to. Ideally, most advisors will tell you that saving 3-6 months worth of your current bills is the best. While that might seem overwhelming, it is important to know that it will take time to get there.
So, start small.
Even $500 to start (if you can) is a good place. That could pay for part or all of your insurance deductible should you get into a wreck or if your pet winds up in the emergency room.
How do I build an emergency fund?
Before you get completely stressed over building an emergency fund and quit reading this article altogether, just know that building this fund will take time and that is ok! Work towards setting small goals and making small changes to lead up to a nice savings account.
Here are some tips to build up your emergency fund:
- Start small! Even if it is $5 a paycheck, just commit to a number. Each time you get paid, you can set up an automatic transfer to your emergency savings account and not even notice the money is gone.
- Use a change jar: When you have cash on hand, put any of the change into a jar. If you rarely use cash, that’s ok too! There are many money saving apps to get acquainted with that will help you save.
- Cut expenses: Take a good look at your monthly expenses. Is there something you can forego? Even temporarily? Make the changes you need in order to get that money set aside for your emergency fund.
- Use your tax refund: An easy way to quickly build your emergency savings fund is to simply use your tax refund. While it may seem like no fun, saving your tax refund is a great way to start.
- Ask for money as a gift: If your friends and family like to give gifts on your birthday or for Christmas, ask them for money instead. They can make deposits directly to your emergency account.
Where do I keep the emergency fund?
The best thing to do when building an emergency fund is to keep it separate from all of your other accounts. That way you will not be tempted to spend it on other things or borrow against it.
You also need to keep it where it is easily accessible and safe from loss. This money should not be viewed as an investment, it is your safety net.
So, what is a good account to keep it in?
A high-yield savings account is likely your best bet. These accounts will give you more interest on your deposits than a traditional savings account. It is a safe account that will give you a better return on your money.
Keep in mind though, that you may need to do some research on high-yield accounts first. Some of these types of accounts do have maintenance fees. There are some that do not. Be sure before you sign up for a high-yield savings account that you know whether or not they charge fees.
When should you use the emergency funds you have been saving?
The toughest part about saving up for an emergency fund is to not spend it on other things. This fund should not be used for a vacation, concert tickets or anything else but an emergency.
Stick to using this fund for emergencies only. A definition of an emergency can be described as an unexpected situation that requires you to act immediately. If the situation can wait, then it is not an emergency.
Saving up for an emergency savings fund is a very important and mature thing to do. You can easily start small and build up to a desired amount. The important thing here is to only spend your emergency fund on emergencies. Everyone is bound to experience an unexpected situation that requires an immediate action, and if you are prepared then it will be no sweat off your brow.