Smart saving has its benefits. But for many, it’s not easy. Having an emergency fund is crucial for times when life throws you a curveball. It allows you to handle your emergency quickly. Its also a better alternative to using a high-interest credit card or borrowing from your retirement.
Thinking about setting up your own emergency fund? Here are four steps to help you get started.
Step 1: Set a goal
Financial planners suggest saving three to six months of your salary if you are single and don’t have children. The recommendation for married couples and families is six to nine months of saved income. For most people, that can be a pretty tall order. If you are just beginning to save, set an easily achievable goal. Aim for having two weeks of your regular pay set aside to cover immediate emergency expenses and continue to add once you've reached that goal.
Step 2: Create an account
Create an account separate from your regular bank account. This can reduce the temptation to use your emergency fund savings for non-emergencies. Make sure you can access the funds quickly when you do have an emergency. A savings or money market account set up specifically for this purpose may be the way to go. Most importantly, skip the option to get an ATM card to access the funds, especially if you think you may not be able to resist the urge to use emergency savings for other things.
Step 3: Build up your fund
Getting started is always the hardest part. It’s okay to start with small amounts – over time they’ll accumulate. Make it a priority to pay yourself first. Begin by setting up an automatic draft from each paycheck into your emergency account. Or, take advantage of a bank account that will round up the dollar amount of each purchase and automatically move the difference into your emergency account. Automating the saving process can take the sting out of setting aside some of your monthly income and gives you time to adjust spending habits accordingly.
Step 4: Plan for the long-term
Remember, even small amounts add up over time. Stay the course and plan to save for the long term. You’ll be financially prepared for an emergency. If you’re lucky and you never run into an unexpected expense, you’ll be able to pay cash for a big purchase instead of using expensive financing plans. Congratulations on your decision to start saving!