How to Build Up Your Emergency Fund

emergency fund

If you ever feel as if you’re always behind when it comes to money, the reason may be the absence of something as basic as an emergency fund. In addition to providing cover in emergencies, an emergency fund can form the foundation of all things financial in your life by moving you past paycheck-to-paycheck living to a place where you have some margin to begin building a better life.

If you don’t have an emergency fund right now, here’s how you can get one started. But first, let’s think about how much will be enough to provide the level of safety you’ll need.

 

How big should an emergency fund be?

There are different guidelines for the size of an emergency fund, and all are legitimate for a person who doesn’t have one at all. Some suggest $1000 while others recommend as much as six months living expenses.

Probably the best advice is to pick a target that’s doable. Start with $1000, and once you reach it, increase the target to one month of living expenses. Once you hit that, move the target to two months and so on, until you reach an amount that provides the comfort level you’re looking for.

The key is to set the target at a number that can be reached fairly quickly. If you don’t presently have an emergency fund, speed will be critical. This is not only because an emergency may develop where the money will be needed, but also because reaching a goal quickly can be crucial to your ability to accumulate a fund at all.

 

Try some of these to jump start your emergency fund:

Bank your income tax refund. Rather than spending it on something or using it to pay a bill, use it to start your emergency fund. With an average federal income tax refund being in the neighborhood of $3000, this will be an excellent start for most people.

Bank your bonus. Think of bonus income as being a financial windfall, rather than part of your regular income, and use it to start an emergency fund. This is a way to fund emergency savings without disturbing your regular income.

Bank income from a second job. Many households are pretty tight on their budgets, so the only way to save money will be to increase income. Take a part time job, dedicating all income from the job to your emergency fund. If you take home $500 per month from the job, and commit all of it to your emergency fund for just six months, you’ll have a $3000 nest egg without touching so much as a dollar from your regular paycheck.

Bank proceeds from garage sales and Ebay. Every one of us has stuff sitting in our homes that we no longer need or use, and it’s doing nothing more than collecting dust. Gather it up, clean it, decide what its worth and get ready to sell it. Smaller, high priced items can easily be sold on Ebay; the other stuff can be sold in a garage sale. Craigslist is a good venue for larger items, like appliances and furniture. You probably have hundreds, maybe thousands of dollars worth of salable goods in your home, and the money from the sale of them would be better served sitting in a bank account earning interest.

Once you have your emergency fund started keep going!

At this point, you already have at least a few hundred hopefully a few thousand sitting in your emergency fund, so now will be the time to begin slowly adding to it. Put another way, you’re going to make a full transition into becoming a full fledged saver!

And that’s when good things start to happen.

 

How do you keep it going?

Cut back on living expenses at least a little. As you continue your transition into saver status, this will get easier to do. Just cutting your expenses by 5% will free up an equivalent amount to put into your emergency fund.

Whittle down your debts. If you can stop using and therefore increasing your credit cards, you can begin paying them down just by making regular payments. As you do, your monthly debt service will also drop, and with it, so will your payments, freeing up even more money to plow into savings.

Save a small amount out of your regular paycheck. Next time you get a raise, set up a direct deposit into your emergency savings account for an equivalent amount. Since you were used to living on your pre-raise income, you won’t miss it. And since you know it’s going into your savings also known as paying yourself first you probably won’t feel bad about it either.

Continue to bank windfalls. Next year, repeat the steps listed above in regard to bonuses, second incomes, tax refunds, and the sale of your stuff. You’ll be making the pile bigger when you do, and watching the balance grow will probably be all the motivation you’ll need to keep it going.

 

The real payoff from an emergency fund.

The main purpose of having an emergency fund is having ready cash in case a true emergency comes up, which will keep you from having to tap your credit cards. While that’s the most basic benefit, there’s more.

Once you have a well stocked emergency fund, one that’s at the upper end of your desired range, you can take the disciplines you developed creating the fund and use them for other purposes. You can begin using excess funds to pay off credit cards and other debt. And when those are paid off, or at least under control, you can begin putting your money into investments, like mutual funds and retirement accounts.

As that begins to happen, you’ll begin moving into a most satisfying place financial independence. And it all starts with an emergency fund.

 

(Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, Out of Your Rut. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.)