How to Build an Emergency Fund

Six tips to help you save for the unexpected.

Life has a funny way of throwing you curve balls when you least expect them. Whether you’ve recently lost your job, Fido needs surgery, or your car requires a new transmission, the costs associated with these financial emergencies can wreak havoc on the budget of many Americans.

According to the Report on the Economic Well-Being of U.S. Households in 2017, four in 10 adults, if faced with an unexpected expense of $400, would either not be able to cover it or would access funds by selling something or borrowing money. Of those surveyed, 43% would use a credit card to pay for the expense, 26% would borrow from a friend or family member, 19% would sell something, 9% would use a bank loan or line of credit, and 5% would use an alternative lending option such as a payday loan, deposit advance, or overdraft protection. An alarming 29% would simply not be able to pay for the expense at all.

Why are so many of us unprepared for an unexpected expense? According to a recent Bankrate survey, 20% of Americans simply aren’t saving anything at all and a whopping 47% are saving 10% or less. Out of this group, the main reasons cited for not saving include a high cost of living (39%) and not enough income (16%).

Today we'll discuss all the ends and outs for how to build an emergency fund. 

How much to save in an emergency fund.

Building an emergency fund is one of the most important actions you can take to improve your financial situation. Emergency funds help cover unexpected expenses without creating unwanted debt or forcing consumers to turn to high interest lending services. It’s often recommended that every household have a solid savings account with the equivalent of three to six months of living expenses set aside to ensure you are prepared for unexpected expenses or emergencies that could come your way.

This means you should have enough saved to cover the monthly payments for your mortgage/rent, utilities and cell phone bill, groceries, car payment, gas, insurance payments, medications and any other expenses for three to six months.

Three to six months of living expenses may seem daunting to even the most avid saver, but following these practical steps will prepare you for a financial emergency without breaking your budget or costing you even more in the long-run.

1. Set your emergency fund goal and track your progress.

When calculating the equivalent of three to six months of your household’s living expenses, consider your current income and the total amount of your monthly expenses. Also, consider possible emergency situations your family could encounter and determine how much savings each would require. Don’t expect to have your entire savings goal accounted for right away. It’s okay to start small by saving only what you can spare, and increasing your contributions as your budget allows. Try saving 5% to 15% of your monthly salary to get in the habit of contributing regularly to your savings plan. Continually review your monthly expenses and look for opportunities to reduce spending (i.e. daily trips to the gourmet coffee shop, eating out vs. cooking at home, downgrading your cable package). Ask yourself, “what can I live without?” and direct those extra funds to your savings account.

Learn more about how to implement the 50/20/30 rule here.

2. Open a separate savings account.

Be sure to open an account for your emergency savings that is separate from any other savings accounts. By doing so, you help ensure that your emergency fund will not “accidentally” be used for a vacation or that new car. Also, be sure your account allows you to access your money without penalties. While it’s understandable you would seek out an account with a high rate of return, it’s also important to open a low-risk account so your money is available should the need arise.

3. Pay yourself first.

The old saying, “out of sight, out of mind” rings true when saving for an emergency. Setting up an automatic payroll deduction, or contributions from your checking account will help force you to contribute to your savings on a regular basis and reduce the temptation to use the funds for “wants” rather than “needs.” Learn more about what it means to pay yourself first here.

4. Take advantage of financial windfalls.

Receiving a bonus at work, an unexpected inheritance, a tax return, or a long-forgotten repayment from a friend may seem like the time to splurge, but putting a portion or all of that extra money into your emergency savings will help you reach your goal even faster. Should you have to cover a financial emergency in the future, you will be happy you refrained from splurging on unnecessary items today.

5. Sell unused items.

Take some time to peruse your home for unused items that you could sell via local online marketplaces such as Nextdoor or Facebook Marketplace. According to an eBay/Nielsen survey conducted in 2007, the average U.S. household has more than 50 unused items worth $3,100. The old adage that one man’s trash is another man’s treasure could help you make great strides when turning those items into cash for your emergency savings.

6. Increase your earning potential.

Look for ways to increase how much money you earn. Offer to work additional hours at your job, apply for that overdue promotion or even find a second job if you have extra time in your schedule. Put your additional earnings into your emergency savings account and take pride in the quick progress you are making.

Building up a sufficient emergency fund will not only give you peace of mind and help you prepare for the unexpected, it puts you on solid financial footing and helps secure a positive future for you and your family.  A personal banker from FNBO can help get started by opening a savings account with competitive interest rates and easy access to your funds.  Stop into your local FNBO branch or give us a call for more information.