5 Steps to Building an Emergency Fund

Tips to Help You Prepare for Unexpected Expenses

Having extra funds available for emergencies is an essential component of your overall financial well-being. A common recommendation is to have enough cash to cover three to six months of expenses. For many, though, that can seem like an intimidating number and may discourage even the most well-intentioned savers.

But don’t give up before you start! The game of saving is mostly psychological — and you can win it. Even if you’re starting from zero, regularly setting aside money — even in small amounts — will eventually get you to your goal. It just takes time and a little discipline.

If you’re ready to begin — and especially if you think you can’t — here are five suggestions that might make building your emergency fund easier.

1. Set Several Smaller Savings Goals

Set yourself up for success from the start. Instead of aiming for three months’ worth of expenses right away, start with a more manageable target, such as one month or even two weeks. This makes your initial goal seem more achievable.

Reaching that first goal can provide the motivation to keep going. Gradually increase your target for the second and third goals. By then, saving will have become a habit, and the positive reinforcement from reaching smaller goals will help propel you toward larger ones.

2. Start with Small, Regular Contributions

Begin with a relatively small contribution level. This approach ensures you don’t stress your cash flow, making it less likely you’ll abandon your savings routine.

Identify something in your life you can live without or reduce — perhaps cutting back on your monthly coffee habit, passing on a new pair of shoes, or skipping one big night out.

Choose an amount that fits your budget, whether it’s $5 or $100, and commit to saving it regularly: monthly, weekly, or each paycheck. The key is to make saving a habit, not a recurring struggle.

3. Automate Your Savings

The easiest way to save money is to never touch it in the first place. Most employers provide direct deposit, and some will even deposit into multiple accounts.

Set up a separate account specifically for your emergency fund and have your chosen contribution amount deposited automatically by your employer or bank.

Use a savings account or another type of account that you can’t access easily, unlike a checking account. You likely won’t miss the money, and avoiding frequent balance checks will make the growth seem more substantial over time.

4. Avoid Increasing Monthly Spending or Opening New Credit Cards

Once saving becomes automatic, don’t let a false sense of financial security lead to increased spending. For instance, if you gave up buying new shoes monthly only to replace that habit with another spending pattern, you’re not truly saving.

If you find an extra $50 left over each month, consider whether your savings contribution is too low. Conversely, if you don’t have any extra money left, you might be accumulating credit card debt. Neither scenario is productive. You shouldn’t stop enjoying life while building your emergency fund, but it’s important to maintain focus on its importance.

Having an adequate emergency fund is critical to your financial well-being. Be realistic, but try to reach your ultimate savings goal as quickly as you can. That alone can make life more enjoyable.

5. Don’t Over-Save

Don’t allocate too much of your savings to your emergency fund. By definition, an emergency fund is cash you can access quickly, typically stored in a low-yield vehicle like a savings account with a low-interest rate.

Once you’ve reached your ultimate goal, stop contributing to that account. Instead, start depositing into an account where your money can grow, such as a retirement account, where time can maximize its potential.

Balancing Debt and Your Emergency Fund

If you are paying off high-interest loans or credit cards, balance your desire to build an emergency fund with your need to get out of debt. It’s important to save for emergencies, but the interest on your debt can negate your savings.

Consider setting a more modest emergency fund goal initially and put any additional savings towards your debt. Once your debt is paid off, you can accelerate your emergency fund savings and increase your goal. In the meantime, having a small cushion is better than none at all.

By following these steps and maintaining a balanced approach, you can build a robust emergency fund while managing your overall financial health effectively.

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