3 Steps to Make An Emergency Fund

Turn on any financial news show and the host, say a Suze Orman or a Carmen Wong Ulrich, will mention an emergency fund. It’s always stressed that your emergency fund (aka the EF) should be 3-6 months expenses. Based on savings rates in the US few people have even a few weeks expenses set aside.

It seems like an impossible task especially if, like us, you are still working on getting out of debt.

You may even think (like I did for a long time) that you could rely on your credit cards or home equity for emergencies, and really throw everything you can at paying off your debt.

Learn more: 12 Ways To Prepare For A Zombie Apocalypse (or other emergencies)

The problem with that is you get into a vicious cycle of adding more debt, and stretching yourself too far to have enough to make it through the month. When a real emergency hits, forget it, you have no money set aside so back on the credit card it goes.

With tightening credit it makes even less sense to use credit as your backup plan. Despite the bailouts, banks are making it even harder for even good customers to keep their credit. Stories abound about consumers getting their limits slashed, unused accounts closed, and rates skyrocketing. The only way out is to reduce your debt load, and make sure to use your account or lose it.

So how can you get to that 3-12 month’s living expenses?

1. Go through your bills and tally your monthly living expenses. You do NOT need 3-12 month’s income. Since many people are living close to their means, this may also be a good time to find anything unnecessary and trim those expenses. (that unused gym membership, monthly subscriptions you aren’t using, etc.) You can contribute that savings to your emergency fund.

If you have debt (and most of us do!) you want to start with a “baby emergency fund”. This is an idea that financial guru Dave Ramsey purports as the first step to getting out of debt. For most people $1,000 is enough. We found over the course of several months that we needed $2,000 when we had to tap into our EF more than once in the course of a month.

2. Set up a savings account at a bank where you do not have your checking. That way you don’t have instant access to it, so it makes it easier to have a cooling off period before blowing your savings on concert tickets or that perfect little black dress.

Online banks are a great choice since they have lower overhead, and it usually takes 3-4 days to transfer your money. Make sure you check out their credentials, you want a bank that’s FDIC insured.

Learn more: Online Bookkeeper To Help You Manage Your Money

We use ING Direct. You can email me for a referral which nets you $25, and in the interest of full disclosure, $10 for me. We also have another account at our local credit union because it earns an amazing 7%! The catch is it only works on the first $500, so I try to maintain $500 in that account. I also like that it’s right there with my checking account so if an emergency pops up I don’t have to wait to pay for it. Our local credit union is Franklin Mint Federal Credit Union, but to find one local to you, or shop around for rates look at CUNA’s datbase.

3. Figure out a painless number to auto-deduct from your bank account. I find it works best if you use the age old advice to pay yourself first, and set up an auto-withdrawl for the day your paycheck is deposited. If money is tight, start small.

Anytime you have extra money (tax refund, refund checks, bonuses) put it in your savings. Once you’ve reached your goal, you can start throwing extra money at any debt you have or save for your other financial goals.

We’ve been growing and using our emergency fund for the last 6 months. My goal for this year is to KEEP our emergency fund at $2,000. It may take all year to get there but I’m determined.

Learn more: Emergency Fund Saves The Day Again

Over the past year we have used our emergency fund for unexpected medical expenses, multiple car repairs including a new set of tires for the hubby’s car, and electric and plumbing repairs for our home.

Do you have an emergency fund? What do you use your EF for?

Kelly

About Kelly

Kelly Whalen is the founder and editor of the Centsible Life blog. She started the blog 6 years ago as her family faced a mountain of debt. The blog became a resource to readers and a hub for everything you need in life for less. Kelly lives in the Philadelphia area with her superhero husband, 4 awesome kids, and one adorable dog. She still believes you can have it all....just not all at once.

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