How to Create an Emergency Fund

We’ve all experienced an unexpected financial emergency – a fender bender, an unexpected medical bill, a broken appliance, or a loss of income. Unexpected expenses can throw a wrench in your financial plan. An emergency fund is kind of like a shock absorber, it’ll keep you from adding to the debt you may likely be already carrying.

Setting up an emergency fund is one essential way to protect yourself. By putting money aside-whether it is large or small amounts-for these unplanned expenses, you’re able to recover quicker.


What is an emergency fund?

An emergency fund is a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies. For example, you may dip into your emergency fund to pay for things like:

  • Home repairs
  • Unplanned car repairs
  • Unexpected medical bills
  • Monthly expenses if you lose your job
  • Unexpected veterinary bills

An emergency fund isn’t designed for nonessential spending. So, you wouldn’t use this money to take a family vacation or get a new wardrobe. Instead, you’d keep this cash in reserve just in case a situation comes up where you truly need additional funds.


How do I build it? 

1. Set several smaller saving goals rather than one larger one

Having specific goals for your savings can help you stay motivated. If you set several small goals, you will be setting your self up for success. Rather than shooting for three months’ worth of expenses right away, shoot for two weeks or one month.

2. Start with small, regular contributions

Set your initial contribution level at a relatively small amount. This will make sure you don’t stress your cash flow, making it easy for you to rationalize your savings routine. Choose your amount – whether it be $5 or $100 – and commit to saving it at regular intervals (per month, per week, or per paycheck). The key is that it needs to become a habit, not a recurring struggle.

3. Automate your savings

Set up a separate account just for your emergency fund and have your chosen contribution amount deposited automatically, either by your employer or bank. Use a savings or other type of account that you can’t easily access.

Don’t watch the account balance continually, that will only make the growth seem smaller and slower.

4. Celebrate your successes

If you’re sticking with your savings habit, don’t miss the opportunity to recognize what you’ve accomplished. Find a few ways that you can treat yourself, and if you’ve reached your goal, set your next one.


More Resources

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