We all have experienced the frustration of an unexpected expense, like when you go to get your car's oil changed only to discover you have engine parts that also need to be replaced. Having an emergency savings funds to cover those costs can keep you from being financially strained as you experience this bump in the road.
While you may have a credit card that you could put these costs on, even if you have bad credit, that may not be a choice you want to have to make. If you want to start a savings account for emergencies, there's a couple ways that you can go about it.
When Emergency Strikes
Unexpected expenses can come in many forms. You could suddenly need to repair or replace a home appliance, make an emergency room visit, or even find yourself suddenly unemployed.
When you set up an emergency fund, you are putting aside money in a bank account to cover these expenses. This emergency fund will provide a financial buffer to keep you from having to rely on options like credit cards or loans which can cost you even more. If you are already in debt, the last thing you need is to bury yourself in even more of it.
It's important to understand that if you want to set up an emergency fund you need to ensure you are using it only for that. Your emergency fund should NOT be used to pay for impromptu vacations, to purchase a new gadget just because you are getting a deal, or to pay for a birthday present.
You need to have a clear line between what is an emergency and what is not. If you do want to set up an account for things like a vacation, then you should work on that savings goal afterwards.
That is why it's important that you set up your emergency fund separately from the bank account that you use on a daily basis. A good type of account to put away your emergency fund is a savings account that has a high yield.
What to Look For in an Emergency Account
With a high yield savings account your money will earn interest while it's sitting there untouched. You will also have fast access to the account.
Another option to consider is a regular savings account. While this is a basic type of account, it can be an ideal choice for you if you're just starting to save for emergencies.
A money market account is also another consideration. You will earn a higher interest rate and still have the easy access of a savings account. One thing to keep in mind is that you may have keep a higher minimum balance to start this type of account or risk paying fees.
All of these types of accounts should give you access to your cash through withdrawals or the ability to transfer the funds somewhere else. This is important since some emergencies require cash on hand.
When you are creating your emergency fund, how much you need to save will depend on your individual financial situation. Ideally, you should save enough to cover between three and six months of your living expenses.
That may seem like a lot of money to put away. The trick is to start putting away a little bit at a time. Even having a few hundred dollars saved up can keep you out of trouble.
Start with a small goal of saving up a month or two of expenses. Then build it up from there until you have enough of a cushion to be able to float yourself through serious situations like unemployment or illness.
What Expenses Should My Emergency Fund Cover?
The type of expenses you will need to cover will really help determine how much you will need to save. Expenses that most of us have to pay include:
- Food -
Take a look at what you are spending every week on your groceries or eating out. As you calculate your food expenses, you might uncover that you are spending way more than you realized. You can save money by going out to eat less, using coupons, or buying sale items. The savings that you earn from cutting back can then be put into your emergency fund.
- Housing -
If you own your house, you have to pay mortgage, property taxes, and insurance. You may want to also add in a little extra for unexpected home repairs. With renting you may still have to pay for insurance. In both cases you'll also have to factor in utility bills.
- Transportation -
Whether you own a car or take advantage of ride sharing, trains, or buses, they all cost you something. Owning a car adds costs like gas, insurance, maintenance, unexpected repairs, and a car loan if it's not paid off.
- Debt Repayment -
These include student loans, credit cards, lines of credits, and other loans that you might have. You need to ensure that at the bare minimum you are able to continue to make payments on these loans so it doesn't affect your credit.
- Living/Personal expenses -
This includes clothes, toiletries, and supplies for your household. We don't typically think a lot of these everyday expenses, but they can add up before you know it.
How to Save for Emergencies
Now you have set up an account and determined how much you need to save to cover all your expenses. It's time to build your emergency fund.
To make saving a sure thing, set up an automatic transfer from your everyday account to your savings. Have the money transferred the dates you are paid, and set up a monthly goal for yourself.
Around tax time, consider putting your refund into your emergency savings to give it a jolt. You can have your refund electronically deposited to your account.
If you have an extra cushion of money in your checking account, move it to your emergency fund or consider ways you can cut your expenses. Little habits like buying coffee or snacks at the gas station can add up to a pretty big chunk of change.
A part-time or temporary second job could also be a good way to earn money for your emergency fund, or if you have a lot of things in your house such as dvds or electronics that you don't use, then try to sell them.
Being prepared will help keep a bad situation from getting worse. Once you have reached your savings goal for your emergency fund, you can work on other financial goals you have. It's going to give you peace of mind of knowing you won't have to cancel a planned vacation or purchasing a new tv if you find yourself facing the unexpected.