As just about every financial expert will tell you, if you’re looking for ways to improve your financial situation, one of the best steps you can take is to start an emergency fund. But when you’ve never done so, or if you’re just the kind of person that struggles to save money, then it’s normal to feel a little overwhelmed by the whole idea of saving for emergencies.
Like any goal worth pursuing, saving an emergency fund takes discipline and commitment. And while there are things you can do to make the process a little easier, ultimately, you have to put in the work.
The good news is, if you’re ready to dedicate yourself to saving an emergency fund, I’ve boiled the entire process down to 5 steps. And that’s exactly what I’m going to cover in the rest of this guide.
So, if you’re ready to take a step toward a brighter and more secure financial future, keep reading.
1. Set An Emergency Fund Savings Goal
The very first thing you should do if you want to start an emergency fund is to figure out an exact number that you want to save. And, as a good rule of thumb, you should set your savings goal equal to somewhere between 3 and 6 months of your current monthly expenses.
In fact, for the sake of accuracy, I recommend averaging your total expenses over the last 6 months–including everything from your rent or mortgage to groceries and even recreation. Then, once you have that average, multiply it by the total number of months for which you’d like to prepare.
Think of it like this, if you were to completely lose your income for the next 3 months, how much money would you need to have saved in order to maintain your current way of life? Don’t just guess. Take the time to figure out the math.
Remember, the purpose of an emergency fund is to make your life easier in the event of a financial emergency. So, be realistic, and spend some time figuring out exactly how much money you need in your emergency fund. This is a number you need to get right.
Oh, and when in doubt, don’t be afraid to set your savings goal a little higher than you think you’ll need.
2. Hide Your Savings Account At A Different Bank
If you’re going to put forth the time and effort it takes to save an emergency fund, you need to do everything in your power to avoid spending it on anything other than an actual emergency. And one of the best ways to do that is to move your emergency fund to a completely separate bank or financial institution than you normally use.
By keeping your emergency fund both out of sight, and slightly less accessible than your normal savings account, you are much less likely to spend it. That way, should the time come when you actually need the money to pay for an emergency, it is sitting there waiting for you.
After all, what’s the point of saving for emergencies if you spend it before an emergency ever occurs?
By the way, if you decide to open a new savings account for your emergency fund, we recommend you put the money in a High Yield Savings account. And if you’re looking for a recommendation, here at Be The Budget, we suggest either an Axos High Yield Savings Account or a CIT Savings Builder Account. If you’d like to learn more about either of these accounts, be sure to check out our Recommended Savings Accounts page.
3. Get On A Written Budget
Once you’ve set a savings goal and hidden your emergency fund in an account at a different bank, the next step you need to take is to get on a written budget.
You see, a budget is like a road map to achieving your financial goals. And since you know how much money you need to save, all you have to do is work backward from that amount. In other words, you can use your budget to figure out exactly what you need to do to reach your goal.
What do I mean?
Well, let’s say your goal is to build a $20,000 emergency fund. Using your written budget, you can play with the numbers and figure out a timeline for your savings goal. For instance, if you want to reach your goal in 12 months, then all you have to do is use your budget to squeeze $1,667 of savings out of your income each month.
Ultimately, no matter what financial goal you’re trying to achieve, getting on a written budget is one of the most important things you can do. And the more dedicated you are to your budget, the more control you’ll have over your financial future.
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4. Save Before You Spend (Always)
After you complete your budget and figure out how much money you need to save each month, the next thing you need to do is actually save that amount. And that brings me to my next point: if you want to start and build an emergency fund as fast as possible, you need to get in the habit of saving money before you spend money.
In other words, whenever you receive a paycheck, before you spend a dime on anything at all, you should move the amount of money you budgeted for savings into your savings account. Then, you should use your budget to live off whatever money is leftover.
Seriously, before you spend money on rent, your mortgage, food, recreation, or anything else, set aside your savings.
I know this sounds a little counterintuitive, but trust me, it works. And if you want to start an emergency fund, and build it as fast as possible, this is your secret to success.
5. Cut Your Expenses
If you want to save an emergency fund, the fifth and final step you should take is to go back to your budget and cut (or reduce) as many expenses as you can.
After all, the fewer expenses you have, the more money you‘ll be able to throw at your savings, and the faster your emergency fund will grow. And let’s be honest, while saving an emergency fund is a critical component of your financial health, it’s not the most exciting financial adventure. So, the faster you get it out of the way, the sooner you’ll be able to move on to bigger and more exciting things.
Bonus Tip: Start A Side Hustle
If you’ve ever visited Be The Budget before, you probably know that we are huge advocates for starting a side hustle.
Seriously, we’ve written about everything from teaching music lessons, selling cupcakes, tutoring, and freelancing, all the way to making money online and even getting a second job. So, if you want to start and save an emergency fund as fast as you possibly can, then we highly encourage you to find ways to earn some extra money.
Oh, and if you decide to start a side hustle, be sure to let us know about it in the comments!
If you want to improve your financial security and set yourself up for success, one of the best steps you can take is to start an emergency fund. Though it might be a little daunting at first, if you break the process into small, bite-sized pieces, I am extremely confident that you can do it.
Are you getting ready to start an emergency fund? If so, what are you doing to make sure you reach your goal? Be sure to comment below!