What would you do if you lost your job tomorrow? Would you have enough money in the bank to pay your bills while you search for a new job? Or would you have to start swiping your credit cards to pay for things like groceries and other household bills?
Building an emergency fund is one of the most important things you can do to prevent yourself from getting into serious financial trouble. Emergencies do and will happen in your life and you need to be prepared for them.
Wouldn’t you feel much better paying cash when an emergency arises and not having to worry about any interest costs?
Decide Where to Keep It
The first thing you need to figure out when you start building your emergency fund is where you want to put your that money. It should be in a high-interest savings account that is easily accessible.
My husband and I have our emergency fund in an ING Direct Investment Savings Account (ISA), which has zero fees and gives us 1.35% in interest every year. If you’re interested in setting up an ISA with ING Direct, please
Determine How Much to Save
How much you should set aside in your emergency fund will vary for every person. Are you single? Do you have kids? Pets? Do you live with roomates? This all factors in to how much money you should be saving.
The recommended amount to save for most people is 3-6 months worth of living expenses. If your family only has one income, 6-12 months is suggested. These living expenses would cover the bare minimum and nothing else. No entertainment, no clothing, no allowances. Only things such as your mortgage/rent, hydro, heat and food.
5 Ways to Start Building Your Emergency Fund Now
1. Start Small: Start with an initial goal of $1,000 for emergencies. If you can’t afford to save much every month, that’s okay. The important thing is to save something. Even a savings of $50 a month means you would have $600 by the end of the year, not including what you earn in interest. Once your financial situation starts to improve, you can save more. When you finally hit that $1,000 target, you can evalutate whether that amount makes you feel comfortable or if you should aim to save more.
2. Treat it Like Bill Pay: Have you ever heard the line “pay yourself first”? This is a good time to implement that advice. By treating your emergency fund savings as a monthly bill that must, you are more likely to put the money away instead of spending it.
Automate: Consider setting up an automatic transfer with your bank where they will deduct a certain amount of money every month (or week) and put it into your emergency fund. By doing this, you don’t even have to worry about transfering money – the bank will do the work for you!
Stash a Tax Refund or Bonus: If you’re fortunate enough to get bonuses at work, don’t spend all of it on wants. Put all (or most of) the money into your emergency fund. You will feel much better knowing that you have money set aside in case of an emergency than you will by purchasing a tangible item. This applies to tax refunds as well.
Sell Something: Do you have something in your home that you could do without? Whether it’s a toy your kids no longer play with, a guitar you never use or even a car that you don’t actually need, sell it and put that money into your emergency fund.
Don’t Touch It
The reason you need an emergency fund is because you need to have money available in case of emergency. Don’t spend your emergency savings on things that are not true emergencies.
Keep your money stashed away until a real emergency comes along.
Examples of Real Emergencies:
- Loss Of Employment
- Death in the Family
- Major Car Repair
- Natural Disaster (Flood, Fire)
- Unexpected Dental Work
- Critical Home Repairs (Roof, Electrical)
Building an emergency fund is an important step you need to take in your quest for financial freedom.
This is one task you don’t want to skip.
Do you have an emergency fund?
amy: I’d say it took about a year or so.
Impressive amount! How long did it take you to save that much?
Martha: Yes, we save most of it (I’d say at least 90%).
I was wondering what do you do with all the money left after paying all your monthly expenses, do you save it all?
great tip, thanks karl
Great advice. As an alternative to an online savings account, you may want to look into a rewards checking account. They offer very high rates.
All good advice. Thanks for sharing Cassie.