Having an emergency fund when unexpected expenses or time off from work is essential. You never know when an unexpected medical bill may pop up or a mechanical issue with a car can easily show a $500 or $1000 expense out of nowhere.
Now when building an emergency fund the first is to set a goal. As we’ve spoken about in earlier posts most Americans unfortunately cannot afford even a minor emergency and you want to be prepared to avoid being saddled with unexpected debt when you least expect it.
The factors that come into play when wondering how much of an emergency fund to have and in what format are numerous. Your emergency fund should be liquid, cash (in a savings account), easily accessible and cover at least 3-6 months of EXPENSES, not income, but EXPENSES. If you’re job is less stable or varies based on overtime, it’s likely better to side with caution and have more. Whether this is held in a traditional savings account (earning at best 1%) or in a taxable brokerage account is per your risk tolerance.
A great balance is to utilize a high yield savings account or Money Market account which can earn between 2 and 3%. Personal Capital Cash is currently offering 2.30%. Just be advised in a taxable brokerage account I would recommend taking your emergency fund number and doubling it to account for down turns in the market as well as keep it in a relatively safe market allocation such as bonds (short-term or long-term depending on market conditions).
Now 7 Ways to Build your Emergency Fund.
1. Budget.
Budget budget budget. Figure out how much you’re spending versus taking in and dedicate a portion of your savings to build this up first. If you’re unsure how to build a budget I highly recommend using Mint.com.
If you are unsure of what Mint offers check out this previous blog post.
2. Adjust your budget.
This combined with cutting back on spending. Do you really need to spend money on certain items that are underutilized or not used? Look into repeating monthly expenses that may have little value to you such as magazine subscriptions, newspaper subscriptions, cable bills, contacting your cable/internet company for new rates either based on your standing as a repeated customer or not needing 600 channels anymore.
3. Sell Items.
Either through garage sales, Craigslist (use caution when meeting with individuals), Ebay, Amazon Trade-In. We all have clutter around the house and keep things that haven’t been touched in years. You may be surprised how quickly $500-1000 can be brought back into the house for those unwanted movies or furniture.
4. Reduce your food bill.
There are two main ways to this. Reduce eating out and meal plan prior to each week and cut coupons accordingly. Eating out while easy is often much more expensive than cooking at home and has the combined issue of often having many more calories and lack of nutrient dense options as compared to cooking at home.
5. Carpool.
You’d be surprised the benefits of carpooling with co-workers or even your spouse can have. In addition to cutting the costs of gas. If you don’t have a carpool situation look into it with your state’s Department of Transportation, they often have programs setup to cover the cost of all required items if you have enough riders interested. Still no luck? Look into public transit or cycling to work if you work close to home.
6. Get a Second job.
Having more income coming into the home and diverting it directly towards savings is a surefire way to build your emergency fund. This can be a regular delivering pizzas or working at a grocery store part-time to add in some extra income. You can also research online, become a virtual assistant or utilize a specific skill set such as building web pages or coding ability. Many online services such as Amazon Mechanical Turk will pay you for these skills. Other options are UpWork which provides a marketplace for freelancers.
7. Establish a savings account.
Open your new account dedicated to being an emergency fund either through your credit union or bank. You can also look into starting a new bank account with a high yield savings account. This will force you to think twice before withdrawing money from it and keep it out of immediate sight from your regular account.
You’re now well on your way to establishing or maintaining an emergency fund! What are your ways to save up for an emergency?