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How To Build An Emergency Savings Fund With Tips From Professionals
Expect the unexpected. It's not a question of whether something will happen that will interrupt the path you're on but a matter of when. You want to be ready to handle any costs that come from life's twists, be it job loss, medical expenses, major home repairs, or anything else.
There's a good reason your mother told you about saving for a rainy day. She was right, as usual. A good financial planner will tell you the same. When you have an emergency fund, you'll stress less about money because you have a Plan B.
Here's what you need to know about an emergency fund.
Why do I need an emergency fund?
An emergency fund provides financial stability.
"No matter how well a person budgets and plans, unforeseen expenses arise. It could be a broken arm, a car repair, or a lost job. Without an emergency fund, individuals struggle to cover these costs and often rely on expensive sources like credit cards or payday loans," says Debra Radway, an associate teaching professor who teaches online and in-person classes at Arizona State University's W.P. Carey School of Business.
How much do you need to save?
This is not a trick question, but it's a bit tricky.
"There isn't a magic number. Getting to your ideal number requires a realistic understanding of how you spend and save your money," says Courtney Alev, consumer financial advocate at the financial website Credit Karma.
Most financial experts, however, recommend having at least three to six months of savings.
Keep in mind, though, "Your financial situation is unique, so you may need more or less, depending on your lifestyle, family, job prospects, and your spending habits. Aiming for six months of necessary living expenses is a safe starting point for most," says Alev.
Where to find cash to build your fund
You get that you need to save for the "what ifs," but maybe you're wondering how to make it happen.
- Spring cleaning is right around the corner. "My wife has started to clean out her closet of old clothes and handbags and started to list them on sites such as Poshmark and eBay. That's a great way to get rid of old junk and earn some extra cash," says Jonathan Maula, owner and chief investment officer of Castle Hill Capital, a wealth management firm.
- You can also build your emergency fund by using your industry knowledge after hours. "If you're in construction, then maybe do small renovation jobs your employer would never take. If you're an electrician or plumber, the same philosophy can be applied," says Maula.
- Keep an open mind about opportunities. Driving for Uber or delivering for Door Dash could help fuel your fund.
- Cut unnecessary expenses. Review your monthly statements and identify areas where you can cut back. "This might include dining out less, canceling unused subscriptions, or finding cheaper alternatives for certain expenses," says CEO and founder of Accrue Savings Michael Hershfield.
- Often people put off saving because they can only put away a little bit each week. But it adds up. If you put aside $10 each week, you would have $520 at the end of the year. If you could put aside $50 per week, you would have $2,600 at the end of the year, points out Radway.
Pick the best place to stash your money
It's important to save, but knowing where to save is important too. Look into opening a bank account that won't charge you fees and will pay higher interest rates than traditional savings accounts, like a high-yield savings account (HYSA). "You're looking for a safe place to keep your money and the ability to access it as soon as you need it," says Alev.
Consider, too, conservative money market funds and CDs. "They are paying over 5% in interest. You can access money market funds almost immediately if needed. If you want to get fancy and have a larger emergency fund that will cover expenses for up to a year, then you can stagger CDs in three-month intervals," says Maula.
Up your odds for success
There are a few things to keep in mind when it comes to your emergency fund. "Avoid keeping that money in accounts with withdrawal penalties or investments with high volatility," says Taylor Kovar, a certified financial planner, CEO, and founder of Kovar Wealth Management.
No doubt it can be hard to stick to your savings goals. One tip for staying on the course is automation. Set up regular transfers to your emergency fund. Adds Kovar, "Keep track of your progress and celebrate milestones to stay motivated."
Lastly, says Yasmin Purnell, founder of The Wallet Moth, a personal finance and frugal living website, "If you need to dip into your emergency fund, prioritize replenishing it as soon as possible. Keeping your fund topped up ensures that you're always prepared for the next unexpected expense."
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