Building an Emergency Fund with Effective Financial Planning

Everyone has dealt with unanticipated expenses—a fender bender, an unexpected hospitalization, a broken appliance, lost hours of work, or a ruined smartphone! Some are big, some are small, but we have all had those unplanned and unexpected expenses land at what feels like the worst possible time. One of the best ways to protect yourself for when life happens is to set aside savings or an emergency fund, and that’s one of the top recommendations for getting started with saving. By saving even a small amount of money for unplanned emergency funds, you will be able to bounce back after an unplanned surprise expenses comes up and be able to refocus back on larger savings.

What is an emergency fund?

An emergency fund is a reserve of cash that is earmarked for unforeseen expenses or financial emergencies. Some of the most common examples are car repairs, home repairs, medical bills, or a loss of income.

Generally speaking, emergency savings can be used offset large or small unplanned bills or payments that will not be part of your normal monthly expenses and spending.

Why do I need it?

Having no savings means that even a modest financial shock can cause difficulties. Once shock turns into debt, it can have long-lasting effects.

Research has shown that people who have trouble recovering from financial shock have less savings that can help protect against future emergencies. They may turn to credit cards or loans, which lead to debt that tends to be more difficult to pay off. They may tap into other savings, such as retirement savings, to resolve costs.

Create a sense of your financial wellbeing.

How much do I need in it?

The amount you want to have in an emergency savings fund depends on your own circumstances. Think about the unexpected expenses you have experienced most often in the past, and how much they cost. If you can at least track down the average of those costs, it will help you to determine a savings goal for funds to set aside. 

If you're living check to check, or your pay checks are not always the same amount each week or month, putting any amount of money aside can seem impossible. Nevertheless, even a small amount will help create financial stability.

Continue reading to find a savings strategy, or strategies, that will best work for your financial situation.

What are the steps I can take to create this?

There are several strategies to implement your savings goal. These strategies will apply to a range of circumstances, such as if you can only save a small amount or if your income tends to be irregular. It could also be that you could utilize all of these strategies, however if you have a limited ability to save, managing your cash flow or contributing a portion of your tax refund are the most effective methods to begin the process.

Strategically creating a habit of saving

Having a savings account, regardless of its amount, becomes less difficult when you can contribute regularly. In fact, it's one of the quickest ways to see it grow. If you are not in the habit of saving regularly, there are a few key principles to creating and following through with a saving habit:

• Set an objective. Clearly defining an objective for your savings will encourage you to save. Your emergency savings could be the realistic objective you set, especially when you're just starting out. Our savings planning tool will show you how long it will take to reach your goal, based on how much, and how often you save. 
• Create a system for making regular contributions. There are many different ways to save, and as you will see below, the easiest way is often to set up automatic recurring transfers. It might also be that you purposely put aside a certain amount of cash each day, week or paycheck period. If you do make it a specific amount each time, and can afford to set it aside sometimes, you will enjoy a faster increase in your savings.
• Keep track of your progress. Find a way that allows you to monitor your savings on a regular basis. Whether it's setting up an automatic notification of your account balance or physically writing down a running total of what you've been saving, tracking your progress will provide satisfaction and motivate you to continue saving.
• Acknowledge your achievements. If you are maintaining your savings habit, take time to celebrate what you have accomplished. During this time, look to find a few ways to reward yourself, and when you meet your savings goal, set a new goal.

Who this is helpful for: Anyone; but particularly those who have consistent income. If you know your paycheck will arrive weekly, bi-weekly, or monthly (or there will be a consistent flow of money coming in), you can build a habit to funnel some of those earnings towards a rainy-day emergency saving fund.

Strategy: Manage Your Cash Flow

Cash flow is simply when you are going to earn money (income) and when bills and spending are due (expenses.) If your timing is off, you may find yourself short at the end of the week or month, but if you are intentionally tracking it you will also start to see opportunities to manage your spending and saving.

 

For example, you may be able to have your bills (like your landlord, utility companies, and credit card companies) adjust due dates. Or you can use those weeks when you have more money available to deposit a once and done little extra in savings as you have the cash.

 

Who is this for: Anyone. This is one important first step in managing any financial situation no matter if you think you live paycheck to paycheck or you have always seemed to overspend what you budget for your spending. 

Strategy: Leverage one-time circumstances to save money

There may, at certain times during the year, be an influx of cash over and above your normal income. For a lot of Americans, a tax refund is the largest check they will receive all year. There may be birthday or holiday cash gifts at certain times of the year. 

Even though it may be easy to spend it all, saving all or some of that cash will help you build up your emergency fund quickly.

Helpful for: Anyone, but particularly people who don't have a regular income. If you receive a large check for whatever reason, it is usually a good idea to save all or some of it.

Strategy: Automate Your Savings

Automating your savings is one of the best ways to establish a routine savings plan and see the savings accumulate over a long period of time. A good option for automating savings is to set up recurring transfers through your bank or credit union so funds automatically transfer from your checking account into your savings account. You can decide how much money you want to transfer and how often, and once you’ve selected that, your savings will become more consistent.

However, it is always a good idea to be cognizant of your balances so overdraft fees don’t occur if you did not have enough funds on deposit with your bank when the automatic transaction occurs. To help you stay cognizant of your budgets and balances, think about setting up automatic notifications or calendar reminders to check your account balances.

Who will find this helpful: Anyone, but especially those with a steady income. Again, you can decide how much and how often to transfer funds between accounts, but you want to ensure that you have money coming each time you transfer. If your situation changes, and your income becomes inconsistent or if your income decreases, you can always change your transfers.

Strategy: Save through work

Another way to save automatically is through your employer. Besides employer-based contributions for retirement, you may have the option to divide your paycheck between checking and savings accounts. If you receive your salary through direct deposit, ask your employer if it can be deposited into two separate accounts. If you are likely to spend your pay on money when you get it, this will be an easy way to save without thinking about it.

Who is this helpful for: For those who receive income on a regular basis. If you are getting a check from your employer regularly, pay yourself first by automatically transferring a portion to savings.

Where should I store it?

Where to store your emergency fund depends on you. You want to ensure the fund is safe, accessible, and in a location where you won’t be tempted to spend it on non-emergencies.

There are several places to put your emergency savings. You can pick the one that makes the most sense for you:

• Bank or credit union account: If you already have an account at a bank or credit union—which is generally considered the safest place to put your money—it might make sense to open a separate account so you can hold and track these funds.
• Prepaid card:A prepaid card is a card you can load money onto. It’s not associated with a bank or credit union and you can only spend the money in your account.
• Cash: The last option to hold emergency cash could be in cash at home or with a trusted family member/friend. Always remember cash could be stolen, lost, or destroyed.

When should I apply it?

Establish some boundaries for yourself to help determine what is an emergency or unexpected expense; not every unplanned expense is an emergency but try to be consistent. Even if it isn’t an emergency-room expense, you may need to use it for some medical bill that insurance didn’t cover. 

A reserve for unexpected financial shocks will help you avoid using a credit card or loan to pay for those expenses that leads to debt. If you put those expenses on a credit card or took out a loan to pay for those expenses, your one-time emergency expense may become significantly larger than the original expense noted, because of the interest and fees that accrue quickly. 

Nevertheless, do not be afraid of using it if you truly need it! If you did spend down the emergency savings you will just need to build it back up over time, it will get easier as you practice your skills in accumulating savings over time.