An emergency fund can help relieve some of the stress and worry when an unexpected event happens. Learn how to start an emergency fund in 4 easy steps today.
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Let’s face it. Life can change so quickly. You never know what is going to happen from day to day. One of the best ways to be protected when an emergency does arise is to have an emergency fund.
What is an emergency fund?
An emergency fund is money that has been set aside each month to help you prepare for extra expenses that may occur.
Why is an emergency fund necessary?
Having an emergency fund allows you to be prepared when life throws you a curveball. Whether you lose your job, your car breaks down or there is a medical emergency, you can feel confident you can handle such an event.
It can also stop you from making bad financial decisions such as incurring more debt. You won’t have to charge it to your credit card or ask to borrow money from family or friends.
How much should I have in my emergency fund?
Most financial experts will tell you that it’s recommended that you have 3-6 months of expenses put aside.
However, I think that $1,000 is a good starting point. Then, you can gradually start increasing the amount you add to your emergency fund. It may be easier for you to set a smaller goal at first.
4 Easy Steps to Start an Emergency Fund
1. Wants vs. Needs
It’s important to be aware of your wants vs. your needs anytime you want to save money or start a budget. So, take out a piece of paper and write wants on one side and needs on the other. Write down all of your needs.
What are needs?
Needs are the necessary things that you cannot live without such as:
- Food
- Shelter
- Transportation
- Clothing
What are wants?
Wants are the things that you can live without. They are the items that you choose to buy such as:
- Entertainment
- Dining out
By having a clear list in front of you then you can begin to prioritize some of the things that you may be able to cut from your budget. Allowing you to free up money to use for your emergency fund.
2. Make a budget
When you make a budget, you begin to understand your cash flow. This will lead you to stop overspending and make your money work for you.
In order to get started, you need to make a list of every penny you spend. It may be beneficial to track your spending for 2-4 weeks. Whenever you make a purchase, write it down. This will allow you to identify your spending habits.
Once you have a clear view of how much you are spending, you need to add up all your income. Don’t forget extra income you may get from extra jobs, a side hustle, etc.
Subtract your expenses from your income and this is the money you have left. This is the money that you can use toward your emergency fund. If you find you have a negative balance. This means that you are spending more than you are bringing in. You need to find ways to reduce your expenditures or you may have to find a part-time job or add a side hustle to bring in some extra income.
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3. Realize what is considered an emergency.
So far, you have determined your wants vs. needs and set up a budget. You are now ready to begin saving your money. But, before you begin it may also be helpful to determine what you consider to be an emergency.
It’s important to remember that an emergency fund is different from a savings account. You are not using this money for a vacation or if you want to buy a new TV or go out to a fancy dinner. This money is only to be used in an emergency. You find out your car needs new brakes. This is an emergency. But, using it because a pair of shoes you want are on sale obviously doesn’t count as an emergency.
4. Be successful
Now, you are finally ready to start saving. Here are some ways to be successful and help you stay on track when you are starting out:
⦁ Keep your emergency fund in a separate account. It may be beneficial to keep it somewhere other than your main bank. Especially if you think you may be tempted to dip into it for non-emergency funds.
⦁ Start small. If you can only put aside $50 a week or even $50 a month at first. At least you are starting somewhere.
An emergency fund benefits you in the long run because it provides peace of mind when the unexpected happens.
You will never have to worry about borrowing money from family or going into debt with high credit card bills. You will be making your money work for you!
Don’t forget to sign up for my FREE RESOURCE LIBRARY that’s full of printables to help you stay organized on your journey to save money.
