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How to Start an Emergency Fund

Nina Rodríguez

Staff Writer

6 min. read

Imagine you wake up one day excited to take your dog to the park for some fresh air and play time. But as you are heading out, you notice something is off with your best furry friend. 

Before you know it, you’ve ditched the park for the veterinarian and you’re holding a bill for $1,000 worth of treatment. It’s never fun to have to spend money when you weren’t expecting it, and when you are not financially prepared for this kind of situation, the hit is even harder. 

Things like this happen all the time, and perhaps it’s even happened to you or someone you know. For those without pet insurance, it doesn’t take a lot for a trip to the emergency vet to rack up a bill of $1,000 or more.

While they don’t always involve your pets, unexpected situations where an emergency fund would in handy are common. To make it a bit easier to start one yourself, we talked to experts to get their advice.

Emergency Funds Are For … 

An emergency fund is holding aside a certain amount of money that will better equip you to handle any sudden event or expenses. In the words of David Flores, financial planner and editor of Planning to Wealth, “an emergency fund is a sum of money you save in the event of unforeseen circumstances that could change your financial stability.” 

Some examples of surprising situations that can compromise your financial stability are:

  • A car crash or any car problem
  • A medical or dental emergency
  • Job loss or transition 
  • The sudden death of a loved one
  • Home repairs
  • Unexpected travel expenses
  • Disaster recovery 

As you can see, there are a lot of situations where you could benefit from having an emergency fund. But nevertheless, a July 2019 Bankrate survey found 28% of adults in the U.S. have no emergency savings, and only 18% could live off their savings for at least six months. 

“With an emergency fund in place, you can hopefully avoid piling on high-interest personal debt, which can quickly spiral out of control,” says Michelle Brownstein, a certified financial planner at Personal Capital

Flores adds: “Most people can benefit from an emergency fund. It can be a great safety net for those looking to branch out and follow their passions. It provides a sense of safety any time you may take a calculated risk or when you need to weather the storm of a potential financial setback.”

Slow and Steady and You’ll Be Ready

The most important part of having an emergency fund is just starting it. Rather than rushing to get to a certain amount of money by a set date, “you can start your emergency fund small and build it up in stages. The longer you can contribute to it, the larger it will be,” Flores said.

Count your monthly income and monthly expenses

“There is no one size fits all amount for an emergency fund, but a good rule of thumb is to have enough for 2-6 months worth of your monthly expenses put away. Be sure to customize your emergency fund based on your circumstances,” Flores added. Make sure you are considering your individual financial situation since not everybody has the same scenario, family situation, dependents, financial stability or expenses.

Decide how much you need and set a goal

Once you do all your calculations, “keep in mind that basic living expenses are just that – not the same amount as a regular salary. Think about the amount of an expense that may force you to charge it on a credit card – having that much available as a start can make a big difference,” says Sean Fox, co-president at Freedom Debt Relief. Once you set a goal, even if it seems small, remember to meet your goal. 

Think how much can you save

If you “determine how much you can save each week or month and you can only transfer $10 to a savings account, consider that you’ll have $500 in a year,” explained Fox. Remember, Rome wasn’t built in a day. 

Reduce expenses

Nicole Iacovoni, a financial therapist, says “cut out some luxury items to reduce your monthly expenses. Take the money you’d usually spend on eating out or going to the movies and save it for any unplanned bills.” Making a few changes to how you spend your money can also help you create a solid emergency fund. Once you are done with the goal you set, you can treat yourself to celebrate that mark.

Hacks on how to start your emergency funds

  1. Sell things you are not using: check around your house; if you did not remember you even have something of potential value, consider selling it.
  2. Unexpected money? Put it aside to start your emergency fund.
  3. Check out one-time income opportunities: focus groups or online surveys that pay you can be a great way to start getting more money.
  4. Get a new gig: starting that emergency fund might be just one ride away. You can get extra income if you drive for Uber or Lyft, plus there are many other apps and companies that offer side gig economy opportunities, such as Fiverr, TaskRabbit, or Mechanical Turk. Pro tip: if you live in Chicago you can use Uber Works as a shift-work finder app. The company recently launched it in Chicago; keep an eye out for it in other major cities.

Cash Flow Versus Saving Account

There is no clear right or wrong when it comes to how to hold cash for an emergency fund., Some experts recommend having the money in sight and others advice, putting it into a savings account. The experts that recommend keeping your emergency funds as liquid assets, which means cash on hand, lean toward making sure the money is accessible within a short amount of time.

For Ash Cash Exantus, director of financial education at Bankmobile, “your savings account and your emergency fund should be separate accounts, so you don’t use it unless you truly need to. However, setting up your emergency fund as a high-yield savings account can help you earn in the long term.” To this point, he adds “credit should be your last resort in an emergency. Only do so if you are able to pay it off when the bill is due. Otherwise, you can rack up high-interest debt.” 

On the contrary, Iacovoni states that she personally keeps her emergency funds “in high-yield savings account so I can earn interest while still having my money accessible.” To Flores, “a savings account is also a low-risk account and is insured by the FDIC up to fairly large amounts.” You can decide what’s best for you, but if you think the money will be safer without you having it close at hand, it’s probably better to keep it in a bank account.

Do’s and Don’ts for Your Emergency Fund

An important note from experts on this matter is that emergency funds should not be used for recurring things or expected expenses such as vacations, holidays, vacations, or buying a new house or car. Here is a list of other do’s and don’ts when managing your savings for emergencies.

Do’sDon’ts
Start creating an emergency fund right away.Don’t stress out about not having one yet, It’s never too late to start.
Set boundaries and have a goal.Don’t use the money to take a vacation.
Remember the importance of only using it for true emergencies.Don’t use the money for things that are not an unexpected expense like short-term savings.
Establish an emergency fund in stages.Don’t give up, there is no right or wrong amount of money to start with.
Personalize it to fit your lifestyle, income bracket, situation and needs. Don’t use it for paying off credit card debt or a down payment of a home.
If you need to use your emergency fund, keep in mind that you should build it up again.Don’t put it in an account where it will incur large taxes or penalties if you withdraw money.
Make the fund a priority.Don’t use the emergency funds for investing.
Keep building your emergency funds.Don’t use your 401K or IRA money.

Being thoughtful about saving money for emergencies will translate into peace of mind, being ready for problems or other unexpected circumstances  you might confront and having a good safety net without compromising your pockets.

Update: A previous version of this article incorrectly identified the name of the company where certified financial planner Michelle Brownstein works.

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