5 Steps To Starting An Emergency Fund

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An emergency fund can be life-saving whether it’s an emergency trip to the hospital, loss of job, car repair, or any uncertain incidents that require you to spend money right away.

Having an emergency fund is not an option. Yes, one way or the other everybody faces those dire situations that require your money.

What is an emergency fund?

As the name suggested, an emergency fund is an amount of money you put aside in case of emergencies. Having an emergency fund will give you peace of mind to face those emergencies.

We will talk about the 5 important steps on how to create an emergency fund of your own.

1. Start Budgeting

The first step to being able to create your emergency fund is to start a budget plan.

When you start budgeting how much you make money and spend money, you will be able to understand your financial situation and spend intentionally.

Write down your take-home salary after tax and also your total spending in a month. Try to cut down on unnecessary spending and save as much money as you can.

Here is a guide on how to start budgeting.

2. Start Saving for an emergency fund

Regardless of your debts and bills to pay, set aside a certain amount of money for your emergency fund. When you budget, you will be getting a fair idea of how much you can save up. The beginning few months will not be that easy and you need to do some tweaking to your budget plan.

Aim to save up at least $1,000 first with a goal time stamp so that you do not procrastinate for other time. This will give you time to stick to your original budgeting goals too.

Believe me, by the end of 4 or 5 months, you will become more aware of your financial status, and following your goals will become easier.

Most experts advise saving up to 3 months’ salary as an emergency fund while some advise a 6-month salary. Aim to achieve your goal as faster as you can.

Create a goal time stamp. This is very important. If you do not give a time period, you are sure to procrastinate as and when you desire.

For example:

Goal 1: To save up to $1,000 within 3 months from January to March.

Goal 2: To save another $1000 or more within 2 months from April to May.

3. Pay off your debt

Alongside saving for your emergency fund, attack your debts. The earlier you clear your debt, the faster you can move towards achieving financial stability.

Write down all your debts including credit card bills. You can use the snowball method or the avalanche method.

With the avalanche method, you are attacking the highest interest debt first and with the snowball method, you are paying off the smallest debt first and moving on to the bigger ones gradually.

Here is a complete guide to paying off your debt and financial education by Dave Ramsey’s book – The Total Money Makeover.

4. Check your spending and use cash for the purchase

This strategy will save you a ton of money in the long run. Stop using your credit card to purchase something.

I am not talking about spending your credit card on something that is 100% guaranteed to give you higher benefits instantly. If it is so, you can use your credit card.

But for those things like apparel or something which you want but can very well live without them, make it a point to use cash.

Let this truth sink inside you – If you do not have the cash to buy something, you cannot afford it right now.

Cut off every extra subscription and money spent on the fun to the maximum. You know you do not actually need those! Focus on saving every penny every time.

5. Make automatic savings and investment

Diverting your money automatically to your emergency fund or saving account (it must be a different account other than your salary account) is a good way to save because once it is transferred to your saving account, you are not supposed to touch it.

You can talk to your bank if there is any option for saving automatically.

Do likewise for your monthly investment. You do not need to have a huge amount of money to start investing. You can start investing as low as $10!

If you do not have any debt, put every extra money that comes your way into saving and investing. You will reap the benefits after some years.

FAQs On 5 Steps To Saving An Emergency Fund

How much money should I have in my emergency fund?

The ideal amount of money you must have in your emergency fund is 3 months’ salary.

To start with, focus on saving $1000 first and then go for the 3 months’ salary saving. Some experts even recommend saving up 6 months of your salary.

How much you save is ultimately up to you as it depends on your situation but your main goal should be to save at least 3 months of your salary.

Where should I save my emergency fund?

Keep in mind, that your emergency fund needs to be accessible at any moment.

It is a great idea to park your emergency fund in a place that will grow without any risk. One such place is using a high-yield savings account.

Check out for banks and the interest they give on saving accounts and open an account with them. This is the first step in starting your emergency fund.

Please try to avoid saving cash at home as an emergency fund – you will be more tempted to use them in no time. Of course, you sure must have some cash to spend but the specific fund you assigned for an emergency should be parked in a high-yield saving account. 

When should I use my emergency fund?

You can use your emergency fund in real emergencies like:

  • Medical emergencies
  • Unexpected car or house repair
  • Being jobless

Remember, your emergency fund is not for buying something you want. It is only for meeting those emergency needs.

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