THE BROKEN WALLET

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How much should you have in an emergency fund, and how to save an emergency fund?

Even if you know the importance of an emergency fund, you might ask, what is a good emergency fund, or how much should I have in an emergency fund?

Saving money is a crucial aspect of managing money. This is why we have personal savings accounts, money market accounts, certificate of deposits, and it’s also why we prepare for retirement with 401(k)s and individual retirement accounts (IRA). Unfortunately, though, saving money is easier said than done—but it doesn’t have to be. 

In this article we’ll explore a few tips for building an emergency fund. But before diving into this, it’s important to know: What is an emergency fund? How much should be in an emergency fund? And where’s the best place to keep your emergency fund?

What is an emergency fund?

When many people speak of an emergency fund, they’re often referring to their “one and only” savings account with their bank. Yet, an emergency fund is so much more. 

This is an account that you’ll grow slowly over time, and only touch in an “emergency.” And no, wanting a new pair of shoes or a weekend getaway doesn’t constitute an emergency.

An emergency refers to situations like losing your job, experiencing a decrease in income, illness, or perhaps a major home repair or car repair. When these expenses occur, the idea is to go into your emergency fund and pull out cash—rather than use a credit card.

So basically, your emergency fund is an account that’s separate from money you’ve set aside for other purposes.

How much should you have in an emergency fund?

Truthfully, there are no hard or fast rules with regard to how much should be in an emergency fund. Some financial experts recommend a minimum 6 to 12 months of living expenses in an emergency fund, whereas others only recommend a minimum of 3 to 6 months.

The bottom line: you need at least several month’s of income stashed away. Why is this important? 

To put it simply, anything can happen with your income. Even if you feel secure in your employment, your job situation can quickly change without warning. And without an emergency fund, you might rely on credit to keep your head above water. 

Here’s what you can do: Aim for a three-month emergency fund—but don’t stop here. Continue to save once you hit this goal. It might take a few years, but the idea is to eventually have 12 months of living expenses or income in your fund. This way, you’re in a better position to handle financial ups and downs.

Where to keep your emergency funds?

It’s convenient to open an emergency savings account with the nearest bank. But let’s be honest, brick and mortar savings account rates are pitiful and don’t offer the biggest return on your deposit. 

My recommendation is to open an online high-yield savings account and keep your emergency fund here. This is beneficial for two reasons. One, you’re able to earn a higher interest rate. And two, an online savings account makes your cash less accessible, so you’re less likely to take cash for frivolous purchases.

Tips for building an emergency fund

But it isn’t enough to know that you need an emergency fund. You have to build this fund. Here’s a look at a few simple tips to start growing your emergency savings today.

• Direct deposit half of your paycheck into savings each pay period. Or, deposit your entire check into savings, and only transfer to checking what you need for expenses.
• Enroll in your bank’s savings program. Some banks—like Wells Fargo—have programs that deposit $1 from your checking account into your savings account every time you make a debit card transaction. Or, use other savings programs like Acorns, which rounds up your debit or credit card purchases and invests the difference.
• Before buying anything, wait at least 24 hours. I’ve found that once an item is out of sight, I no longer have the desire to buy it. Take the money you would have spent on the purchase and deposit it into your savings.
• Get a part-time job or a side hustle. If you can make an extra $75 a week, that’s about $300 a month or $3,600 a year that can go toward growing your savings account.
• Sell stuff you don’t use. Take advantage of eBay, Craigslist or Facebook marketplace. Clean out your closets and garage and get cash for things you no longer use.
• Cut expenses. Trimming a few dollars off your budget each week (grocery, transportation, entertainment, recreation and dining out) can result in tremendous savings. Deposit the savings into your emergency fund.
• Cancel subscriptions. How much are you paying for subscriptions each month? The cost of Hulu, Netflix, Audible, Spotify and other services adds up. For services you rarely use, cancel your subscription and put the savings into your emergency fund.