How to Build the Perfect Emergency Fund
Whether you’re faced with a busted air conditioner or an impromptu trip to the ER, a well-built emergency fund can help you take life’s little surprises in stride.
If you’ve ever been faced with an unexpected expense you know how much of a strain it can put on your wallet and peace of mind. An emergency fund is a smart and easy way to make sure you can afford things that may not already be covered in your budget. They also provide an alternative to relying on credit cards, personal loans, and other forms of self-imposed debt. So, if you haven’t already started to build your own emergency fund, here are some simple steps you can take to get started:
1. Look at Your Bank Statements from the Past 6 Months
See how much you have been spending on essential and nonessential items. If you can, try to cut back on some unnecessary expenses and see if you can do without them. It might be hard at first, but putting your “needs” before your “wants” is a great first step towards financial stability. You might even be surprised to see how much money you save by making the switch.
2. Build a Budget or Sign Up for an Online Budgeting Tool
Now that you understand where your money is going each month and have cut back on the unnecessary expenses, you’re ready to start building your budget. Budgets get a bit of a bad rap, but they can be an incredibly helpful tool. Not only can they ensure you’re not overspending, but they can help you better understand your money habits and ensure you’re contributing to your goals on a consistent basis. Once you get in the habit of living on a budget, you’ll enjoy the benefits of controlling your money instead of it controlling you.
While you can easily create a budget with a pen and paper or an Excel spreadsheet, I highly recommend looking into an online budgeting tool (such as Tayne Law Group’s Budget Jewel) to help. Many of these apps are built with beginners in mind and can help guide you through the process.
3. Calculate How Much You Can Contribute
Depending on how much room you have in your budget, the amount of money you can contribute to your emergency fund may vary. However, a good rule of thumb is to try and contribute 10% of your net income to your emergency fund until it’s complete. For example, if you receive bi-weekly paychecks you’d want to make contributions to your emergency fund every other week. So if you were to take home $2,000 every paycheck, then you would be contributing $200 twice every month.
After 4 years, $400 dollars a month will have added to a whopping $19,200! And that’s before accounting for interest.
4. Start Saving!
Once you’ve finished calculating how much you can give all that’s left is to start saving! Ideally, an emergency fund should cover at least 3 months worth of expenses. However, some people go as far as six months to a year.
If you find that you’re forgetful type, you may want to look into automatic transfers with your bank. That way you’ll be able to build your emergency fund every paycheck without even thinking about it! Make sure to check your contributions every now and then of course. Who knows, maybe in a few months time you’ll be able to give even more and finish your emergency fund ahead of schedule!
When it comes to maintaining financial stability, keeping a well-stocked emergency fund is key. While it might take some time to get started, having an emergency fund is sure to provide you with the financial support and peace of mind you need. Have you ever built an emergency fund? What did you think was the easiest part about it? What about the hardest? Let us know in the comments below!