How to Build an Emergency Fund
Most people face some sort of financial emergency during their lifetime. This could range from home and car repairs, to a job loss or health scare. And it's usually not easy to pay for these unexpected expenses. In fact, a 2011 survey by the National Foundation for Credit Counseling showed that 64 percent of Americans don't have enough cash on hand to handle a $1,000 emergency.
That's why having an emergency fund is important. Most financial experts recommend setting aside enough money to cover your expenses for at least three to six months. But if you're not already there, don't worry. It might seem like an unattainable goal, but we're here to help so that you can be prepared for the unexpected.
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1. Determine How Much Money You Need
When you're creating an emergency fund, it's important to be accurate and realistic about what you'll need. Remember, what you spend during good times can usually be pared down when money is tighter.
Also, take a look at your monthly expenses and determine what is a necessity and what is a luxury. Things like cable television, gourmet coffee, and dining out are expenses that can be reduced or even eliminated from your budget during challenging times.
For help figuring out how much you should set aside for emergencies, please see our Calculator.
2. Set Up a Separate Liquid Account
Put your emergency savings somewhere accessible, but not too accessible.
Your checking or savings account might not be the best place to keep it since you can easily dip into that stash. Instead, save your funds in an account that's liquid—one that is easily convertible to cash, such as a separate savings or money market account.
Since even the high-yield versions of these accounts have lower rates compared to other savings vehicles, they may not feel like the best place to store your emergency fund. But remember, your goal isn't to make money. It's to have a place where you can quickly withdraw funds when you need them, without high-penalty fees.
Once your emergency fund contains more than a few months of expenses, you can consider an alternative, such as a certificate of deposit (CD) with a high annual percentage yield. Just make sure you choose a short-term CD, and leave enough money in a liquid account so you don't defeat your efforts.
3. Set Up Automatic Deposits
If you wait until the end of the month to contribute to your emergency fund, there may be nothing left. Setting up an automated monthly transfer into your emergency account is a great way to make sure you stay on track with your plan.
Once you commit to doing this, it will help you better budget your money.
4. Make Your Emergency Fund a Savings Priority
It may seem overwhelming to save for three months of expenses or more, but it's important to start somewhere, even if it's somewhere small. It may help to set an initial goal that's achievable in just a few months, like $1,000. Or begin with a small amount that you increase incrementally. You could start with only $20 a week, then raise the amount when you reach a point where you don't miss that income.
Also, because an emergency fund is so important, you may want to put it at the top of your savings to-do list and wait on other kinds of savings plans until this fund is built up.
Most importantly, don't touch your emergency fund unless a financial emergency presents itself. When that time comes, you'll be thankful it's there.
Neither State Farm® nor its agents provide tax, legal or investment advice. Please consult your own adviser regarding your particular circumstances.