A Step-by-Step Guide to Building Your Emergency Fund

According to a recent study, nearly 80% of Americans acknowledge that they could not handle an emergency that would cost $500. This means that eight out of every ten Americans would need to use a credit card, putting themselves further in debt, if they encountered a situation that cost $500 or more.

If you’re in that number, it’s important to start building your emergency fund as soon as possible. If you’re not sure where to start, we’ve got you covered. This step-by-step guide can help you go from wondering how you’re going to pay for that new car battery or appliance breakdown to dealing with financial emergencies as they come.

Having a safety net when it comes to your money not only puts you on solid financial ground for the future but also helps you experience less stress in the present. With that in mind, let’s get into how you can start building your emergency fund.

1. Be Realistic

One of the most important aspects of money management involves being realistic when it comes to how much you need and how quickly you can save that amount. When establishing your emergency fund, you’ll want to take a realistic approach, especially if you’re not making a lot of money at the moment.

Some people assume that they can’t afford to start saving for an emergency because their job doesn’t pay enough, but that’s rarely the case. However, you must be honest with yourself about what your path to an emergency fund looks like.

Let’s assume that you want to save $1,000 to serve as your emergency fund. If you don’t have an extra $250 every two weeks to put into that account, be honest with yourself. You won’t be able to put that $1,000 away in eight weeks.

Instead, be willing to start with a smaller goal or give yourself more time to reach the goal that you set. Your emergency fund is yours, and your path to it is unique to you.

This is a marathon, not a sprint, so don’t get frustrated if it takes you a little while to construct your financial safety net.

2. Review Your Expenses

One of the most common mistakes that people make when trying to build their emergency fund is to assume that they don’t have any money to put into their accounts. This is usually because they’re spending some of their money irresponsibly.

If you don’t feel like you have enough money to start an emergency fund, sit down and make a list of where your money is going every month.

Start with the money that you have to spend. Expenses like your rent or the mortgage on your home, monthly utilities, and other necessities cannot be cut. However, things like going out to dinner, going to the movies, and some of the streaming services that you barely watch are all optional costs that can deplete your money.

When we talked about setting a goal, we spoke about the importance of being honest with yourself. It’s important to keep that in mind during this step of the process.

Be honest with yourself about the things that you’re wasting money on, and be willing to cut back on those things. This doesn’t mean that you never enjoy a nice dinner out with friends, but it may mean that you stop eating lunch at a local restaurant every day.

By making some relatively minor changes, such as cutting out the two streaming services that you use the least, you can start freeing up some money that can be better used in your emergency fund.

3. Establish a Dedicated Account

Some financial experts recommend keeping your emergency fund on hand in cash somewhere in your home. The logic behind this is that it allows you to pay cash for something if you encounter an emergency in your home and don’t have time to get to the bank.

However, many people who struggle with money management don’t do well when they have cash lying around, as they end up spending it frivolously.

We recommend that you establish a separate account that you use to keep your emergency fund separate from other funds. When you get this account set up, it’s a good idea to automate the money that you put into it every month.

Over time, you’ll stop noticing the money that you’re putting into the emergency fund. By keeping your emergency funds away from your other money, you don’t have to worry about spending it on non-emergencies.

4. Set Aside Any “Extra” Money

It’s pretty normal to run into some extra money throughout the year. These windfalls provide you with a great opportunity to build your emergency fund up quickly. Things like tax refunds, gifts, bonuses from work, and other windfalls are all great sources of money that you don’t have to do anything to get.

Unfortunately, many people tend to view those windfalls as “free money,” and they use the money that they provide to go on vacations, shopping sprees, and other entertainment options.

Until your emergency fund has reached the amount that you want it at, funnel any extra money that you come into throughout the year into your emergency fund.

Depending on any number of factors, you may only need between $1,000 and $2,000 in your emergency fund, so a bonus from your employer and some gift money that you receive for your birthday can help you reach your goal quickly.

5. There’s an App for That

In our digital world, there’s an app for basically everything that you need to do, including saving some money. There are several apps that allow you to round up the purchases that you make to the nearest dollar and then put that extra change into an account.

You may not think that a few cents here and there make a huge difference, but they can add up quickly.

If you’re one of the millions of people who struggle to save money consistently, these apps are a great idea. There are also platforms that allow you to earn a percentage of cashback on transactions of a certain type.

For instance, if you use your debit card at the gas pump, some apps allow you to get 1% back. Taking advantage of these technological advances is a great way to put some extra money away for a rainy day.

6. Supplement Your Income

Finally, if you don’t feel like you’re making enough money to get your emergency fund off the ground, look for ways to supplement your income. There are plenty of opportunities that allow you to pick up some extra money, whether it’s through the gig economy or by working from home for an online company.

Something as simple as picking up some Uber riders for an hour every evening when you get off work can help you put an extra $30 or $40 in your pocket each day.

If you’re willing to put some work into building your emergency fund, you can start building up your money much quicker than you previously assumed.

Start Saving Today

Having an emergency fund isn’t just about avoiding additional debt that comes from using a credit card for major purchases.

It also helps you cut down on the amount of stress and anxiety that you feel when thinking about your money.

These tips can help you get your emergency fund off the ground, and soon, you’ll be able to handle any sort of unforeseen financial emergency that comes up.