5 steps to starting an emergency fund from scratch
No emergency fund? Consider these five ways to get started
If you have nothing saved for an emergency, you’re not alone. In fact, in its recent Survey of Consumer Finances, the Federal Reserve reported that Americans’ median savings account balance sits at $5,200. And, for those under the age of 35, the typical amount in savings is just $1,580.
However, an emergency fund could make all the difference when you’re facing a variety of unforeseen circumstances such as a job loss, a costly medical crisis or a repair to your home or car. It can help carry you through those tough times and helps to protect your family against financial disaster.
“Setting aside money for the unexpected isn’t always easy,” said Joseph Sheils, senior vice president of retail banking at MB Financial Bank. “A person needs to be disciplined to create a savings plan, but knowing you have funds available for that immediate, unforeseen need can certainly help give you peace of mind.”
If you’re ready to start the process of building your savings, here are five steps to consider.
- Choose the right place to keep your money.
First things first. Your emergency fund should have a home of its own. If you mingle your savings with your fun money or the cash you use to pay bills, you might spend it away. So isolate your emergency fund in an account that keeps your money safe — in a separate savings account, for example.
- Add up your monthly expenses.
Don’t know how much you spend in an average month? Someone else may have been keeping records for you.
You have bills for your mortgage and utilities. Your credit card statement might detail how much you’ve spent on individual purchases. And your bank account balances reflect how much you withdraw and deposit each month.
Pull everything you have on paper or digital statements. If possible, look back over six to 12 months, so you don’t miss infrequent costs like insurance premiums, tuition payments and holiday spending. Once you have your data in front of you, estimate how much money leaves your pocket, on average, each month. This number represents your typical monthly expenses.
If you want to make the process as easy as possible, consider tapping into a powerful app like Mint. Use it to download records from all your financial accounts, take advantage of spending category suggestions and access reports on where your money’s been going.
- Identify a target amount.
Now it’s time to pinpoint the dollar amount you want to have stashed away in your emergency fund. The Federal Reserve’s Report on the Economic Well-Being of U.S. Households reveals that just 48% of American adults have enough money set aside to cover three months’ worth of expenses.
Most financial experts recommend having a sum set aside that equals three to six months of living expenses, though some advocate up to 12 months. Choose the number of months that gives you peace of mind. Consider opting for a larger savings account goal if you have children to support or are particularly worried about your ability to replace a lost income quickly.
- Determine your savings strategy.
Now you know the number you’re aiming to hit. So how do you get there? Where is all this money coming from?
If your income already exceeds your expenses, you’re in a good place. Decide how much of that excess money you can put each month toward your emergency fund. If you’re breaking even — or sinking into debt — over time, you’ll need to get a bit creative:
- Give something up. The money saved on small luxuries can add up big time. Swap out some of your lunches for a brown bag from home or scale down your next vacation.
- Use bonus money. What extra funds can you funnel into your emergency fund? Consider your tax refund, annual work bonus, credit card cash back and even that birthday check from your favorite aunt.
- Sock away a bit of every paycheck. Every pay period, transfer a predetermined sum out of your checking account and into your emergency fund. Be realistic in the amount you choose. And start small, so your savings plan is sustainable — for instance, 1% to 5% of your take-home pay, and you can build from there.
- Get moving.
Get ready to put your plan into action!
To stay on track, set up automatic banking transfers. Have money whisked into your emergency fund regularly without ever missing it or having to remember to move it. Also, set up appointments with yourself to review your progress. Is your emergency fund growing over time? Do you need to make some adjustments in order to reach your goal?
Even when you do hit that target, be sure to review it regularly. The magnitude of your expenses can shift over time. Plus, changes to your family’s lifestyle might mean that it’s time to increase the number of months of saved income in your emergency fund.
When the unexpected occurs, the last thing you want to worry about is money. And a healthy emergency fund can help ensure that your family is prepared for the surprises life throws your way.