How To Build An Emergency Fund

How To Build An Emergency Fund bb3 Apr 13, 2011

By Staff writer State Farm™ Employee

Most financial experts recommend having enough money set aside in an emergency fund to cover your expenses for at least three to six months. But saving regularly to accumulate that much money may seem like a daunting task, especially with all of your other financial obligations.

Not sure how to get started? If youíre able, you can always kick-start your emergency fund with your tax refund, a work bonus, or a cash gift.

If thatís not a possibility, youíll need to strategize a savings plan.

Determine How Much Money You Need

But first figure out how much money your emergency fund should contain. The easiest way to determine this is by taking a hard look at your monthly expenses. Common monthly expenses include:

  • Housing, such as mortgage, rent, and association fees
  • Utilities, including gas, electric, and water
  • Telephone, cable, and internet
  • Food, including groceries, coffee, and dining out
  • Transportation, including car or lease payments and fuel, or public transportation fees
  • Health insurance premiums and prescriptions
  • Other insurance premiums
  • Health club memberships
  • Retirement and other savings contributions
  • Debt repayment

Be both accurate and realistic while keeping in mind that how much you spend during good times can usually be pared down when money is tighter. Luxuries like cable television, gourmet coffee, and dining out are all items that can be reduced or even eliminated from your budget during challenging times. In fact, trimming these indulgences can also be a good place to start if youíre not sure where youíll find extra money to save.

Set Up A Separate, Liquid Account

Next, find a place where your emergency savings fund will be accessible Ė but not too accessible. Accumulating and maintaining your emergency fund can be difficult, even more so if youíre easily able and constantly tempted to dip into it for non-emergency circumstances. For this reason, your checking or savings account probably isnít the best place to stash your emergency fund. But you can open an additional account with your bank, or at another bank in your area that isnít conveniently located.

Regardless of where you keep your money, save it in an account thatís liquid, that is, one that is easily convertible to cash, such as a savings or money market account.

Since even the high-yield versions of these types of accounts have lower rates compared to other savings vehicles, they may seem like an unwise place to store your emergency fund. But remember, your goal with this money isnít to make more money. An emergency fund isnít an investment with growth youíll need to depend on, like a retirement savings fund; such investments arenít often easily accessible without paying penalties. Since youíll need to withdraw money from an emergency fund when you least expect it, youíll want to be able to do so consequence free.

Of course, once your emergency fund contains more than a few months of expenses, you can consider an alternative, such as a certificate of deposit with a high annual percentage yield. Just make sure that you choose a short-term CD, and leave enough money in a liquid account so you donít defeat your efforts.

Make Your Emergency Fund A Saving Priority

Finally, start saving! As in other types of saving, the key to building your emergency fund is to pay yourself first. But given the importance of an emergency fund, you may want to make it the top item on your savings agenda Ė even forgoing or reducing other saving until your fund is built up. At that time, you can resume your other saving plans.

As with any saving, itís important to start somewhere Ė even if itís somewhere small. You may want to set an initial goal, like $1,000, thatís achievable in just a few months. Or begin with a minor amount that you increase incrementally. Your strategy may be to save only $20 a week until you reach a point when you donít notice the income missing, then raise the amount.

Most importantly: Donít touch your emergency fund unless a financial emergency presents itself. When that time comes, youíll be thankful you didnít.

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