How to Start an Emergency Fund: Six Ways to Save Money Fast
What is an emergency fund?
An emergency fund is a specific savings account that you only use to cover expenses in the event of an emergency. Personal financial planners will tell you that an emergency fund is even more important than paying off certain kinds of debt—because having an emergency fund is what prevents you from going into debt, especially debt with burdensome terms like payday loans. That said, if you need emergency financial assistance now, these resources can help guide you in making the right next steps.
How much should I have in savings?
According to investment management company, Vanguard, it’s good to save three to six months’ worth of expenses saved for an emergency. This is referred to as your emergency fund ratio, a measure of how ready you are to cover unexpected life events such as a sudden loss of income or having to pay a huge medical bill.
The emergency fund definition also requires that this cash be placed in a savings account you never touch, unless it’s a true catastrophic emergency. If that sounds like a lot, it is—but start small, opening a dedicated savings account for your fund and putting whatever you can in it each month. Even $50 a month will add up to $600 at the end of your first year.
Stay liquid and create a firewall
Emergency savings needs to be held in an account that’s liquid, meaning you can withdraw the funds immediately if needed. Your emergency fund shouldn’t be deposited in a retirement account because you are not able to access those funds right away and you want to avoid using accounts that have high tax penalties for early withdrawal (IRAs or 401k plans). You can fund those accounts separately after you’ve saved for an emergency.
Separating these savings creates a kind of firewall between your emergency funds and your retirement savings. If you run into an emergency like a house flood, you don’t want to have that emergency affect your financial security as you get older.
Biggest benefit of a savings fund: Peace of mind
Perhaps the biggest benefit of building an emergency savings fund will be the peace of mind you gain. Knowing you can deal with emergencies such as job loss, disability, unplanned housing or transportation expenses, emergency surgeries, natural disasters, or theft, or any unexpected expenses can take a ton of weight off your shoulders.
While few of us suffer emergencies frequently, most of us will face some emergency, large or small, at some point in our lives. It’s always best to be prepared with an emergency fund
Six ways to save money fast
The good news is that saving money is straightforward in practice. It often comes down to spending less, not making more. To save, you need to live within your means and be vigilant about cutting unnecessary expenses. Here are five easy tips to teach you how to build an emergency fund fast:
1. Keep an eye on the little things
Be especially mindful of little extravagances that add up over time and have a low positive return. For example, a daily cappuccino that costs $4 adds up to almost $1500 a year and you can likely get the same effect while spending less money. Opting for a $2 drip coffee instead of a cappuccino is a safe place to start. Just like that, you’ve saved yourself $700 a year. We aren’t saying that you have to cut out coffee completely, or anything else for that matter—simply look through your bank statements and see where you could make small changes.
You can also skip driving your car and opt for carpool services instead, which can provide a lot of fuel savings long-term.
There are also certain charities and resources that can help you with your everyday bills. Be sure to read through this guide to see and check if you’re eligible for assistance: How to Get Help With Bills: Resources.
2. Be goal-driven
Set a monthly savings goal based on your budget. Then, set up an auto-transfer through your bank account or company payroll to put a specific amount of money into your emergency savings account each week or month. For example, if your monthly savings goal is to set aside $100 per month, set up an auto-transfer within your bank account to send $50 to your emergency savings account every two weeks. After a few months, you won’t notice the auto-transfer you set up and you’ll have $1200 saved in your emergency fund in one year’s time.
3. Make it harder to cheat yourself
The question of where to keep emergency fund money is an important, but often overlooked, consideration. After all, It’s easy to spend money on a whim if all your money is sitting in a checking account, linked to your ATM card. It’s even easier if you carry a handful of credit cards on top of that. Next time you go out with friends, leave your credit cards in your desk drawer at home. Focus on only spending money that you have in your checking account, and you may see that your spending habits change drastically. By spending less, you will be able to set aside more savings for your emergency fund.
4. Get competitive
If you’re someone who’s inspired by competition, challenge a friend or family member to a savings contest. Create a timeline for your challenge that is a few months down the line so that you both have time to make a real dent in your emergency fund. This challenge can double as helping you find a financial accountability partner in your journey to save more money. When you have someone to talk to about your financial questions, you may also find that the mystery around how to save for an emergency fund disappears.
5. Find a side hustle
The easiest way to save money is to be making more of it in the first place. Consider picking up a side job like driving for Uber or Lyft, walking dogs through an app like Wag!, or freelancing in your current industry outside of your day-to-day job. Of course, time can be as hard to come by as money. The beauty of these side jobs is that, generally, you can choose when you work. Create a schedule that works for your lifestyle and start investing in your emergency fund one day at a time.
6. Start a crowdfunding fundraiser to build your emergency fund
If you’re wondering how to get emergency money fast, an emergency fundraiser is a great place to start. Along with saving, crowdfunding can help give your emergency fund a boost—or protect it after a disaster. When we face any event beyond our control, from medical emergencies to natural disasters, our friends and family want to help—and creating a fundraiser on GoFundMe is a perfect way to get emergency funding started. If you need inspiration before you start building your own fundraiser, take a look at these emergency fund examples:
Start weaving your safety net
After you’ve opened a savings account specifically for your emergency fund and drafted your plan for saving, start crowdfunding today on GoFundMe. If you raise more money than you believe you need, you can deposit the excess into a new emergency fund for the future or you can help fund someone else’s emergency fund. For more tips, read Developing and Financing a Disaster Recovery Plan.