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How to Set up an Emergency Savings Fund

Establishing your emergency savings fund is a critical step toward your financial health and well being. Your emergency fund should be a first priority, superseding other investments. Getting an emergency fund in place might also be a bigger priority than short term spending. Take an honest assessment of your financial situation. How close are you to financial disaster? What if you lost your job for an extended period of time? What if you had a sudden, costly medical emergency? An emergency savings fund may not seem as exciting as other investments or expenditures, but having this fund in place could have huge implications for you, should you ever need it.

Get Started

It is easy to put off starting an emergency fund. It seems like a difficult goal to have a substantial amount of money in the bank to tap for emergencies. Don’t allow yourself to get discouraged. Get started immediately and begin with small amounts.

Have a Long Term Goal for Your Fund Amount, and a Short Term Goal to Help Get Started

Establish a long term goal for your fund. How much do you need to have set aside, ideally, in your emergency fund? Financial planners may recommend three to six months of expenses, but consider your particular situation. Are you self-employed with variable income? Is the economy shaky? Is your job not as secure as it used to be? What about potential medical expenses? Be honest and liberal with your estimation of your monthly expenses.
Establish shorter term goals as well. You may decide that your long term goal is an emergency fund with a year’s worth of expenses. Keep that long term goal alive in the back of your mind, and then focus on the short term – regularly building your emergency fund, one dollar at a time.
Consider a combined approach. Some financial planners recommend establishing a $1,000 emergency fund first, then paying off any debt, and then building the fund to the desired amount (three months expenses, six months expenses, a year, or more). The benefit to this approach is psychological and pragmatic – you get the short term gratification and encouragement of setting a small emergency fund up right away. This method may work for you.

Regularity is Key to Success

If you establish a regular system of contributing to your emergency fund, this will cement a beneficial habit into your daily life. Set a goal of contributing to your account weekly, biweekly, or monthly. Set a minimum amount to contribute on a regular basis. But if you’ve set a biweekly goal of contributing $25 to your account, and there’s a week you’re unable to contribute that amount, put in whatever you can.Regularity is more important here than the amount – you are establishing an important, good habit and building a key component of a successful personal finance plan.

Pay Yourself First

When you receive income, pay yourself first. Send money to your emergency fund before you spend money on discretionary items. For some, this is easier said than done. Consider automatic deductions, if these are available to you. If you are paid by an employer, for example, check into how funds can be automatically deducted from your paycheck, and be sent straight to your emergency fund. This is an effective way to grow your fund steadily.

Create More Money to Send to the Emergency Fund

Is your home or apartment full of stuff you’re not using? Sell items online or have a garage sale. Send the proceeds immediately to the emergency fund.
Send any extra money you receive – money that you are not normally expecting – to the emergency fund. This might include birthday gift money, tax refunds, or rebates.
Trim your expenses. Are there ways you can cut spending in your everyday life to build your fund?
Consider increasing income, and sending extra to the emergency fund.