How to build an Emergency Fund

An emergency fund is money set aside in a bank account to cover unexpected expenses.  Here is why you need one and how to setup an emergency fund quickly.

Unexpected Expenses

At some point in life we are all going to face unexpected expenses.  These might include:

  • Hospital Visits and emergency care
  • Car repairs
  • Home appliance repairs or replacements
  • Unemployment

These expenses can be in the thousands of dollars.  In a worst case scenario you could be faced with both unemployment and an unexpected expense.  

Personal and Payday Loans

Without an emergency fund, many people turn to personal or pay day loans.  You’ve probably seen the ads on TV which promise cash in your account within a couple of hours.  The catch though is you’ll be forced to pay massive interest rates.  Many people will struggle to ever pay off these loans and soon find themselves in a debt spiral.

Other people will put these large expenses on credit cards.  Again you’ll be paying huge amounts of interest.  The longer you can avoid getting into debt the better.

This is all pretty bleak.  But that’s what an emergency fund is for – the bleak times.

How much do I need in an Emergency Fund

An ideal emergency fund will hold 6 months of expenses.  These expenses would include your rent, utility bills, and groceries.

Most people are going to struggle to save this amount.  Remember this is an “ideal” emergency fund.  Even if you can only save up enough to cover a couple weeks of rent that is better than nothing and could make a huge difference.

Where to save an emergency fund

For regular saving I recommend apps like Raiz.  But these apps aren’t suitable for an emergency fund.  Cashing out your money from Raiz can take 5 days. While this is great for preventing impulse buys it doesn’t work for emergency funds.  You need instant access to your cash.  Most banks offer online savings accounts.  While these aren’t good for regular saving (as the interest rates are so low), they are good for putting money aside.    These accounts allow you to transfer money in and out instantly from your everyday transaction account.

You’re funds won’t grow by themselves in these online saving accounts, but that isn’t the point.  You just need a liquid place to put money aside for an emergency.

I find it works best when your emergency fund is separate from your regular transaction account.  This way you have a clear picture of what is in your fund and you’ll be less likely to use it for impulse buys.

Getting Started

The perfect time to start an emergency fund is right now.  Even if you’re only starting with a few dollars.  To build your fund I would recommend setting up an automated transfer.  You can do this through online banking.  Even if it’s just a few dollars a month, it will soon start to add up.  When you have spare cash, use it to top up your fund.

Here are some ideas for building your fund:

  • Save your Tax Return – everyone loves to spend their tax return.  Do the boring option and put it into your fund.
  • Add Supplemental Income – turn your spare time into extra money.  It might only be a few dollars here and there, but it all counts.
  • Save spare change – put all your spare change into a jar.  You can take this into your bank to deposit.  Many banks even have automated coin deposit machines.  You’ll be amazed at how much you can save.
  • Monthly Review – do a monthly review to see if you can adjust your automated transfers.  Aim to keep increasing how much you save, even if it’s just $1 or $2 more per month.

Building an emergency fund is boring.  It’s not as fun as saving for a holiday or new car.  But it will have the most impact on your life.

This post is for educational purposes and should not be considered as investment advice. This post is based on individual experience and journalistic research.

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