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Build an emergency fund

If you have a rainy day, will you be financially prepared? Consider these points to start an emergency savings fund.

Boy on bed with his piggy bank

Building an emergency fund may actually be easier than you think. Here are some ways to save and be prepared in case a financial disaster strikes.

What is an emergency fund?

An emergency fund is another term for money set aside for unexpected expenses. It’s recommended to have this readily available so if the need arises you won’t need to use credit.

Why do I need an emergency fund?

We can’t predict what will happen, especially when an emergency comes up. Being prepared with an emergency fund might help to cover unexpected costs. Those expenses might include:

  • Medical emergencies/expenses,
  • Loss of job,
  • A water heater bursting, or
  • A heater breaking down during the cold of winter.

What is a good emergency fund amount?

How much you need depends on your circumstances. But, typically, the recommendation is to have saved between three and six months of expenses. And don’t panic if you can’t save that immediately. Start small, but start! Even $500 can help with a small bill. Then determine what you can save each month to begin building the fund.

Where to put your emergency fund

It’s not an investment so don’t put it somewhere where you can’t get to it right away. Your money needs to be easy and quick to get to — like a checking account or a money market account that has either check-writing privileges or a debit card. You don’t want to combine it with your everyday accounts, however. It should be in a completely separate account — maybe even a different bank.

How to start an emergency fund

Determine how much you need to save. Using a savings calculator can be helpful in determining how much that amount should be.

Setting a monthly budget will allow you to see just how much money is coming in, going out and how much you can put toward your emergency fund. Then commit to saving that amount every month. And if possible, have the amount automatically transferred to the account — out of sight, out of mind.

Other amounts that could be contributed to the account:

  • Save your change. Any time you break a $20 bill, save some of the change in a jar. If you have a pocketful of coins, drop that in the jar, too. When the jar gets full, transfer the money to your emergency fund.
  • Getting a tax refund? If you are expecting a tax refund, have it automatically deposited to your emergency fund.

And be sure to regularly evaluate what you are saving. Did you get a bump in pay? Why not commit that increase to your emergency fund? Did you pay off a debt? Keep “making the payment” but now it goes in to your emergency fund.

Use what you learned

Expenses might be easy to calculate during good times. But it's not until your budget truly is tight that you're able to easily draw the line between needs and wants. If an emergency caused you to have to dip in to your funds, did you figure out the difference between what you really needed and what you wanted? And be sure to evaluate and figure out what worked and what didn’t. Was your money easily accessible? Was the amount you saved sufficient? Did you have to rely on credit cards to fill in the gaps?

Don't delay saving again

And if you’ve had to use your emergency fund, be sure to begin rebuilding it. Did you have enough to cover the expense? Do you need to save more? Reevaluate. Keep planning, keep saving, keep finding unique ways to add money to the account.

It may take a while to reach your ultimate saving goal. But just remember, in the long run, it’ll be worth it.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. State Farm makes no guarantees of results from use of this information.




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