Discover 4 ways to save for emergencies
Life is unpredictable. No matter how carefully we plan, unexpected expenses have a way of sneaking up on us.
An emergency fund ensures you can cover medical emergencies, car repairs or other surprises without resorting to high-interest loans or credit cards. Let's explore how to build up an emergency fund and which of life's curveballs call for dipping into this account.
Emergency fund goals
The amount in your emergency fund may depend on your lifestyle, but there are generally two phases:
- Phase one – Work toward saving $1,000. This will keep you from resorting to credit cards or payday loans to pay for an emergency expense.
- Phase two - After you’ve saved $1,000, the next goal is to save three to six months’ worth of living expenses. This fund will help you through longer-term challenges, like a job loss or an injury, that keep you out of work for a while.
Strategies to save
Building up your emergency savings can be challenging, especially when your budget is tight. Try out these 4 strategies to up your savings game.
1. Make saving a no-brainer
Set up an automatic transfer moving money from your checking account to a savings account specifically designated as your emergency fund. Pro tip, schedule the transfers on payday. That way, you won’t forget to move the money manually or be tempted to spend it right away.
Some banks offer unique programs that help you automate savings, like First Federal’s Automatic Savings Program. When you opt-in through your online banking profile or the mobile app, the program automatically moves 3% of every deposit to your checking account directly into your savings account!
2. Be smart with extras
When you receive money unexpectedly, like a larger tax refund than planned or a surprise bonus at work, try to direct this extra windfall into your emergency fund. Ideally, you can deposit the entire amount to savings, but that’s difficult to do with such a good surprise. As a guideline, consider saving 80% of the windfall and giving yourself permission to spend the other 20%.
3. Audit your spending
Dig into your expenses to find where you could reduce spending to carve out some additional savings. Lose that gym membership that you never use. Find a reduced phone plan or another streaming service with less fees.
Here is the important part. Add up all the monthly expenses you were able to cut and set up an automatic transfer in that amount to your emergency fund savings account each month. You shouldn’t feel the effect of it since that money was already leaving your checking account for previous expenses.
4. Find your side hustle
If your full-time job isn’t cutting it, start a side hustle that you really enjoy and brings in some extra cash. This could be a podcast, an Etsy shop, social media content creation, or even handyman work on apps like TaskRabbit. Find something that matches your talents and then use the additional income to build that emergency fund.
Tapping into your savings
It’s important to know which situations warrant your emergency funds versus your typical checking or savings. Here are some examples:
When to avoid using your emergency fund
Your emergency fund is there for, well, emergencies. That means you shouldn’t tap into the fund for things that aren’t critical to maintaining your financial stability and well-being. For example:
- A big sale - Even though your favorite brand is having an unbelievable sale, it’s not an occasion that justifies dipping into your emergency fund.
- A trip of a lifetime - An opportunity pops up to take a trip you’ve always been interested in taking. Raiding your emergency fund to pay for it may be a risky move.
- Regular monthly bills - Tapping your emergency fund to pay for monthly bills may create a bad habit. This is a sign to reevaluate your spending.
- Minor inconveniences - Irritating things happen, like cracking your phone screen or having your car dented in a parking lot. Try to budget for these situations with a little buffer in your checking account instead.
When to use your emergency fund
Your emergency fund can be a financial lifeline when unexpected events disrupt your life. Here are some situations that call for your emergency funds:
- Medical emergencies - Your health and well-being should always be a top priority. If you or a family member faces an unexpected medical emergency and you don't have sufficient insurance coverage to handle the bills, it's time to access your emergency fund.
- Essential home repairs - When crucial problems threaten your family's comfort or safety at home, using your emergency fund is a reasonable choice. Examples include everything from a leaking roof to a broken furnace.
- Loss of income - If you suddenly lose your job or face an unexpected reduction in income, your emergency fund can help cover essential living expenses in the interim, like rent or mortgage payments, utilities, groceries, and insurance premiums.
- Car repairs - For many, a working vehicle is crucial for getting to work or meeting other responsibilities. If this describes you, then it's acceptable to use your emergency fund for vehicle repairs.
Your emergency fund is a financial tool providing invaluable peace of mind. However, it's important to resist the temptation to use these hard-earned funds for non-essential expenses. Follow these guidelines to build and use your emergency fund to feel confident and prepared for whatever life throws at you.
