To build a solid financial plan, an emergency savings fund is essential. That way, a sudden job loss, home repair, or medical emergency won’t overwhelm your finances. We have the advice to get you started when you’re ready to begin.
What Is Emergency Savings?
Before diving into how to start an emergency fund savings, let’s understand what it is. An emergency savings account is set aside, which is explicitly used to cover unexpected, large expenses like:
- Car repairs
- Home appliance repairs and replacement
- Medical expenses
Why Having Emergency Funds Is Important
Why do we need to save money in the first place to put aside in an emergency fund? You create a financial buffer that keeps you afloat in emergencies without relying on credit cards or a loan. If you already have debt, it creates a hole that you need to dig out of when you’re putting yourself in more debt.
An example of what could happen without an emergency savings comes from recent news. The Covid-19 pandemic caused people to lose their jobs, and many of those are struggling to pay rent, food, and other necessities. If they turn to credit cards with double-digit interest rates, they will be paying more in interest when an emergency fund could have avoided creating a bigger financial issue.
Determining How Much to Save
Now that we know why do we need to save money, we can learn how to start an emergency funds account. The fastest way to save money is by starting to save. How much to save in your emergency fund should begin with baby steps. That’s why many financial experts stress the starting small like $1,000 and working up to a 6-month saving plan or more.
How to Calculate Emergency Fund Savings
An achievable, small amount at the beginning is useful to get you started. But you should ask yourself how much money would make you feel secure if something were to happen. To calculate emergency fund savings should be up to your specific situation.
Consider how much your regular monthly expenses are that you must pay for each month. These expenses should include things like housing, food, utilities, transportation, insurance, and debt repayments.
Figure Out How Is the Fastest Way to Save Money
It’s going to take time to build up your fund, and that’s fine. See how to save money from salary to become more effective. Try to budget before each paycheck so that you have a spending plan before you get a paycheck, which puts you in more control of your savings. Automate your savings by having a percentage of each paycheck drafted into your emergency savings before you even get a chance to see it in your account.
Look at Your Current Spending Habit
The fastest way to save money is actually to look at your spending habit. We find answers about how to save money from salary often by looking at this. Review your statements to find what you’re spending your money on each month. Then determine what areas you can reduce or cut out completed. Here are a few tips:
- Cancel unnecessary services or memberships you can go without
- Reduce the costs of your top three expenses
- Find less expensive alternatives to entertaining you and your family
- Shop around current service providers to see if you can get a better deal
Cutting down on this spending will reduce the time that it takes to reach a 6-month savings plan or longer.
Pay Off Your Debt Faster
If you have less debt, you have more money that you can put towards savings. Plus, it feels like a big burden is lifted when we are debt-free. Here are some tips on how to pay off your debt:
- Put work bonuses, income tax refunds, and other extra money towards your debt
- Sell off unwanted household items and gifts
- Use favorable balance transfer terms to reduce interest expenses
- Start with the most expensive debt you have