Given all that’s going on in the world today, the concept of saving and building up an emergency fund may feel like a pipe dream. But no matter where you are or what you are dealing with in terms of your finances, there is a path toward slowly building up a safety net between yourself and the unexpected.
We often say that it’s important to have an emergency fund with enough squirreled away to cover 3-6 months’ worth of your essential living expenses. But don’t let that number intimidate you: It doesn’t have to happen overnight, and it doesn’t have to be impossible. It always takes time to build up savings, so keep in mind that even if it takes you a year or two or five, the most important thing you can do is to simply get started saving.
Here are six steps that can help you create a proper emergency fund, beginning wherever you are today:
- Start with small steps. If it feels like you don’t have a penny to spare by the time you deposit your paycheck, you’re not alone: A 2022 Bankrate survey found that less than half (44%) of Americans have the savings to be able to pay for a $1,000 emergency, and rising inflation means most are saving even less for unplanned expenses. Luckily, you don’t have to have a lot of cash on hand to start building up an emergency savings account. Try setting up an automatic transfer from your checking account for whatever small amount you can manage—even $5, $10, $20 a month, it all can add up over time. Saving is an area of your finances where slow and steady wins the race. Take a deep breath and keep chipping away at it.
- Open an account just for emergency savings. You want your safety net ready to go whenever you need it, so it’s important to keep it separate from all your other money—and make sure not to use it for anything but a real emergency. Open a new account that’s just for your emergency savings and keep it separate from your day-to-day checking or savings account, but somewhere that’s easy for you to access when you need it. A savings account, money-market account, or CD account are popular choices, but emergency funds shouldn’t be invested in stocks or even bonds because those assets are harder to liquidate and you might not be able to get and use your money quickly enough in an emergency.
- Look for an account that pays you back. Shop around to find an account for your emergency savings that is not only easy to use and easy to reach in a pinch, but one that also offers you some perks. Look for something that will be easy for you to make deposits and withdrawals, that won’t cost you any extra money, and will keep your money relatively safe. For example, some savings vehicles offer a small annual yield that can help your money offset the wear and tear of inflation. Do your due diligence and ask about any minimum deposit, balance requirements, or annual fees (avoid if you can). Read the small print. Talk to your banker or, if you have workplace benefits that include access to a financial coach or financial adviser, you might check in with them for guidance on your choices.
- Set a specific goal. An emergency fund is all about being prepared, so it’s important to know how much you would actually need to help make ends meet in an emergency. Yes, the general rule is 3–6 months’ worth, but how much you need to save in your emergency account will really depend on your personal situation. Think through factors like how much you spend each month on rent, food, gas, healthcare, education, and other necessities. Also, how many dependents do you have? Could you count on a spouse or partner or family member for help in a pinch? Are you the sole breadwinner, or self-employed? What about disability or health insurance? It’s a lot to think about, but you want to err on the side of caution. If the goal you come up with sounds daunting, break it into smaller pieces, like trying to save one month’s worth of expenses by the end of the year.
- Only touch the account in true emergencies. This part is very simple but can be very challenging. Work on building up the discipline to put your money into emergency savings and then leave it alone. Only touch it if you are in a real emergency, like losing your job or facing a large, unexpected expense (your car breaking down, a necessary home repair, a medical emergency or large bill, moving, or a funeral). Be gentle but firm with yourself. For example, a wedding or vacation isn’t an emergency. They’re important, but you want to save for those big-ticket goals separately and only dip into your emergency money for real, unexpected emergencies.
- Refill the account as soon as you can after you use it. This is the real clincher: There’s no way to predict when you’ll need your emergency fund, so the most important part is to try to keep it full. If you need to use it, that’s OK—after all, that’s what it’s there for. But also keep in mind that once you dip in to use your emergency fund, it should be a priority to start replenishing it as soon as you are able to.
Saving as self-care
Life is unpredictable, and yes, it can be a real challenge to build up a dedicated emergency fund—and even more tricky to maintain. But think of this as your financial first-aid kit: You hope you won’t need it, but you want to have it stashed nearby just in case. Even if you don’t need it for years, there’s a real peace of mind in knowing you have a comfortable cushion ready to go. It’s a meaning way to take care of yourself.
Believe it or not, it is also possible to have too much in savings. Most of us probably don’t need more than six months’ worth of savings in an emergency account, and most people benefit from a mix of both saving and investing. Everyone’s situation is different, so again, you may want to speak to a professional about your financial choices. Try your workplace benefits for educational content, access to advice, and more.
On the other hand, if you are struggling financially, know that reaching a state of financial well-being doesn’t happen overnight. Don’t give up. If you need to tap into your rainy-day fund, know that that’s what it’s there for. One of the best things you can do for yourself is to develop the mind-set of always working on either building up or replenishing your savings. Slow and steady wins the race.
April is National Financial Literacy Month. To mark the occasion, MarketWatch will publish a series of “Financial Fitness” articles to help readers improve their fiscal health, and offer advice on how to save, invest and spend their money wisely. Read more here.
Ingrid Lee is chief operating officer, financial wellness, for Morgan Stanley at Work.
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