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5 Tips to Help You Create an Emergency Fund

Written by prositesfinancialApr 27 • 3 minute read

emergency fund

Financial experts agree that having an emergency fund is an essential element of a healthy budget. If you have a sudden expense and do not have an existing emergency fund, you will likely need to borrow money from friends or family, add the expenses to a credit card, or remove money from savings or retirement accounts. None of these are ideal, and all of them will set you back on reaching your financial goals.

What is an emergency fund?

An emergency fund is a separate account or reserve of money that allows you to cover most small to medium-sized financial crises without dipping into your retirement plan or creating new debt. This way, when the emergency is over, it’s really over. You aren’t left carrying a load of lingering debt or a damaged retirement plan. An emergency fund helps you remain on track to reach your financial goals, even when life serves you the occasional lemon.

Here are some tips to help you come up with that first $1,000 so you have an emergency fund that can make a positive impact on any unwelcome surprise.

1. Set Small, Incremental Goals

Just how much should you set aside for your emergency fund? That number depends on what sort of financial disasters you can anticipate, and how much you can afford to set aside. Some experts recommend setting aside 3-6 months’ worth of income. Most people find this amount so overwhelming that they simply never begin saving in the first place.

A more realistic option is to set a concrete number as a goal, such as $1,000. This gives you a fixed amount to work towards, and you can always add more once it has been created. This way, you can gradually save up more and work towards that 3-6-month goal.

2. Pay Yourself First

This is a tried-and-true principle of personal finance. We all have bills to pay, but most of us pay our bills first and then use any leftover money for day to day expenses and discretionary spending. If you want to reach your financial goals, including creating an emergency fund, paying yourself first is the best way to get there.

With each paycheck, have a specific amount that you plan to set aside automatically toward stocking your emergency fund. It could be only $20 or $50, or perhaps $100. Alternatively, you could transfer a percentage, such as 10-percent of each paycheck, to the fund. Eventually, you will reach your goal. 

The key is to treat saving as your top priority so that it always happens. Saving regularly with an automated transfer from one bank account to another is ideal.

3. Create a Separate Savings Account For Your Emergency Fund

Related to the previous point, this one will help you to manage your money better while resisting the urge to spend it on other things. If you set up a separate savings account, that will enable you to separate your savings from your regular spending budget. 

You can set up automated transfers that take a certain amount out of your primary checking account after each paycheck clears and transfers it to your savings account. This principle can also be used to save towards any number of financial goals, not just stocking an emergency fund.

4. Only Use Your Emergency Fund For Actual Emergencies

One of the biggest problems when creating an emergency fund is that the temptation to spend that extra money on other things is just too strong. It can be so tempting to tap into your emergency fund to buy a new laptop for work or a beautiful outfit that’s on sale. You might even be tempted to use that money for a vacation. 

While these are all good things, they are not the objective of your emergency fund. If you spend your emergency fund on other things, it won’t be there when you need it to do its job and get you through a crisis.

If you have a significant other or family member you share financial responsibility with, using the emergency fund should be something you discuss together. Dipping into the emergency fund to cover an expense should be the result of a unanimous decision in favor of it, as this decision affects everyone involved.

5. Route Unexpected Income Into Your Emergency Fund  

You might have some unexpected income from a gift, a yard sale, or savings on a regular expense. Regardless of the source of extra income, if you can funnel that income toward your emergency fund, every little bit helps. 

The best part about this strategy is that you won’t feel the money missing because it wasn’t expected and wasn’t in your budget to start. This strategy is a way of adding to your savings without deducting income from your budget. If you have credit cards or loans, try to pay those off as quickly as possible, then use the monthly payments from them to stock your emergency fund once they’ve been paid off.

Creating an emergency fund isn’t an exciting part of personal finance, but it can create peace of mind and a layer of protection that helps keep your other financial goals on track. Do you have any tips to help others save for their emergency fund? If so, please share them in the comments below!

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