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How to Build an Emergency Fund: 7 Tips to Get Started

In Money Management
A couple reviews their finances to start figuring out how to build an emergency fund.

Let’s say you’re ready to start saving for a college degree, a new car, or a memorable vacation, but an unforeseen expense or month-end emergency wipes out any money you have managed to set aside.

Sound familiar? Getting started on saving and building a better financial future is difficult. Unpredictable events can wreak havoc with your budget, empty your bank account, and make it difficult to escape mounting credit card debt.

You need an emergency fund, a pot of money just for emergencies so you can start to think beyond the next dropped phone, fender bender, or home maintenance crisis. 

Below we explain what an emergency fund is, why it’s important, and how to build an emergency fund of your own. Read on to learn how planning for unexpected events now can help you build a better financial future. 

Emergency Fund 101

Expect the unexpected. Sounds easy, but no one knows what life will throw at them next. Building emergency savings can help prevent a serious but temporary situation from having a lasting impact on your financial future. 

What Is an Emergency Fund?

An emergency fund is money you keep separate from both your day-to-day budget and any longer-term savings or investments. It’s a cash stash you don’t touch unless you face unexpected costs that could force you to tap your savings or add to your debt.

Your emergency fund needs to be a separate account, so you’re not tempted to dip into it as part of your discretionary spending. However, it also has to be available, so you can access it in a hurry.

Why Is It Important?

Your emergency fund is there to stop what should be temporary financial setbacks from turning into long-term problems that can consume your savings, force you into debt, and hold you back from achieving your goals in life.

When you’re working hard to get ahead in life, even a small unexpected expense can eat into savings that should be earning you interest. A real curveball, like losing your income, major car repairs, or a serious illness can send you back to square one in financial terms.

Your emergency fund is essentially a financial insurance policy. Once in place, it protects you from unpredictable events, allowing you to focus on longer-term financial goals such as paying down debt, buying a home, or saving for retirement or a college education.

How Much Should I Have in My Emergency Fund?

The more money you have in your emergency fund, the greater your ability to withstand unpredictable financial shocks. That said, the aim of your fund is to provide enough protection so you do not need to dip into savings or borrow money to survive.

Your emergency fund should provide a reasonable amount of protection while not absorbing money that could go toward your longer-term financial goals, such as saving or paying down debt.

Many financial experts suggest you should aim to have a minimum of at least three months’ basic living expenses saved for financial emergencies. Your basic costs should include your: 

  • Rent or mortgage
  • Utility bills
  • Groceries
  • Essential medications

If you’re still unsure how much that is, consider using the 50/30/20 rule, which suggests allocating 50% of your income to needs, 30% to wants, and 20% to savings and investments.

If you have dependents, you try to put more in your emergency fund. You should also look to save more if you are self-employed, a freelancer, or have an irregular income. In these cases, you should aim to have at least six months’ worth of expenses saved.

7 Tips for Building an Emergency Fund

Ready to put your finances on the road to long-term resilience? Follow these seven steps to make a great start on your emergency fund.  

1. Set a Goal

Decide how much you want to have in your emergency fund. While a savings goal of three to six months’ worth of living expenses is a widely accepted rule of thumb, it really depends on your unique financial situation, including your financial obligations and the security of your income.

Whatever you decide, setting a clear, achievable target will help to keep you motivated.

2. Budget for It

Now decide how much you can realistically afford to contribute to your emergency fund each month. Include contributions to your emergency fund as a line item in your budget and decide exactly where this money is going to come from.

You may need to cut back on monthly expenses or put savings contributions on hold to do this — or even take on extra work to generate more income. While finding the money may involve sacrifices, remember that your emergency fund will protect both your income and your savings.

3. Start Small, Be Consistent

Don’t be afraid to start small. While contributing more will naturally help you build your fund faster, what matters now is to make a commitment and stick to it.

Remember, you’ll build your fund more effectively if you choose a manageable amount and contribute to it consistently than if you earmark an unrealistic amount you pay only occasionally. You can always contribute more in the future if your situation improves.

4. Automate Your Savings

Once set up, you can make contributing to your emergency fund as frictionless as possible by setting up a monthly transfer from your checking account. Automating this process means you will build your fund without even having to think about it.

5. Use Windfalls Wisely

Sometimes life does lend you a helping hand. If you received a tax refund or bonus or an unexpected gift consider funneling at least some of it to your emergency fund. Think of it as an investment in your long-term financial stability.

6. Don’t Over-Save

While it’s wise to prepare for emergencies that can derail you financially, don’t completely abandon other financial goals. For example, it’s not a good idea to delay paying off debt on a credit card or to miss out on making contributions to an employer-matched 401(k).

And, once you’ve reached your emergency fund goal balance, redirect your saving habit to other financial priorities, knowing you can now protect yourself financially from unforeseen events. 

7. Review and Adjust

Your financial situation changes over time. You may find a new job, move to a new city, get married, or start a family. This may change both how much you need in your emergency fund and how likely you are to need it.

Review your emergency fund regularly and decide whether it still aligns with your living expenses and long-term financial planning. You may need to top it up, or you may choose to divert some money to your long-term savings. 

Where Should I Keep My Emergency Fund?

Your emergency fund is (or will be) a significant amount of money that needs to be kept separate from your day-to-day finances but must also be quickly accessible in the event of a financial emergency. 

Your money needs to be in a separate account where it can earn a decent rate of interest to boost your contributions and allow your balance to grow over time. Let’s take a look at a few popular options.

Savings Accounts

Savings accounts keep funds separate from your checking account while money can usually be transferred instantly to your checking account when required. Most also have very low minimum balance requirements, making them a good place to start building your emergency fund.

High-Yield Savings Accounts

High-yield savings accounts offer higher interest rates on deposits but also usually have higher minimum balances or stricter monthly transaction limits than regular savings accounts. A high-yield savings account can be a good option to build up your emergency fund nest egg. 

Money Market Accounts

Money market accounts are designed to offer interest yields closer to market rates than most savings accounts but have many of the same accessibility rules, making them a popular option for stashing money for an emergency fund.

Your money can usually be transferred instantly to your savings or checking account when needed (but usually limited to six transactions a month). Some money market accounts also offer dedicated check-writing services for added spending convenience.

While most money market accounts have stricter minimum balance rules than savings accounts, they also often offer innovative tiered interest rate structures that reward you with a higher yield when your balance passes certain thresholds, making them an ideal place to accumulate and grow money for your emergency fund.

For example, 1st Advantage Federal Credit Union offers a generous flat rate on qualifying deposits up to $10,000 in its Member Rewards Money Market Account, while its Performance Plus Money Market Account offers successively higher interest on deposits over $25,000.

Credit Union Accounts

Credit unions are financial cooperatives owned jointly by and run for the benefit of their members. This means that credit unions are typically able to offer savings accounts that pay better interest and charge lower fees than similar accounts at banks.

Credit union checking, savings, and money market accounts also often have more flexible minimum balance requirements than those at commercial banks.

With higher rates, lower fees, and more flexible rules than banks, credit unions are a popular choice for individuals and families looking to set aside money for an emergency fund or other long-term savings.

Best of all, funds deposited in a checking, savings, or money market account at a credit union are insured up to $250,000 by the National Credit Union Administration in the same way that deposits in bank accounts are guaranteed by the federal government. 

That means choosing a credit union for your long-term saving needs is one of the smartest, safest investments you can make.

1st Advantage FCU: Your Long-term Financial Partner

At 1st Advantage Federal Credit Union we understand the importance of protecting your financial assets from the beginning so you can build long-term wealth. 

That’s why we offer our members financial tools that support and encourage saving at every stage of their financial journey. Our innovative range of savings products offers:

  • Competitive member-exclusive rates, compounded quarterly
  • Free full-service digital banking 
  • Access anytime via our locations or more than 65,000 ATMs nationwide

Contact us today, or click below to learn more about how our savings products can help you reach your financial goals.

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