Unexpected bills are stressful, especially when they’re big ones.
Like when the car breaks down.
Or the washing machine dies.
Or you lose your job.
That’s when an emergency fund comes to the rescue.
An emergency fund takes the financial stress and worry out of an uncertain future.
So what exactly is an emergency fund, how much should you save and how do you save that much? You’ll find the answers below.
The Six Steps to Building an Emergency Fund
Before we get into the nitty-gritty of how to build your emergency savings, we need to answer two foundational questions:
What is an Emergency Fund and How Much Should You Put Aside?
An emergency fund is savings put aside for unexpected expenses or job loss.
Ideally, it should be in a separate, high-interest savings account, where it’s accessible, but not too easily accessible. That means you don’t want a keycard to access your savings if you’re tempted to buy something at the shops.
Your emergency fund shouldn’t be there to cover bills or everyday expenses (that’s what your savings plan is for), it’s there for when life throws you a curve-ball.
So how much should you save?
Does that seem a lot?
It is a lot!
But it’s not impossible to put aside six month’s worth of wages for emergencies.
So how do you save that much?
Here are the six steps to building an emergency fund.
1. Take Your Time
There’s no way around it – it takes time to build six month’s worth of savings.
It took us over seven years!
But that’s ok.
You don’t need to save an emergency fund yesterday.
You just need to start today.
Even if you haven’t saved enough before you need to use your emergency fund, you’ll be better off than what you would be, had you not saved anything at all.
2. Be Consistent
It’s all too easy to find reasons not to put money aside for an emergency fund when there are so many other bills and expenses to pay today.
You can have all the time in the world and still never build an emergency fund if you don’t save towards it consistently, every payday.
No matter how much you put aside, even if it’s only a couple of dollars a week, time and consistency together will mean you reach your emergency fund goal.
Make this process easier through…
3. Automate the Process
I’m a big fan of automating your finances.
Automating your emergency fund savings guarantees consistency. Automatically put money aside each and every payday before you even have time to miss it or spend it on something else.
You don’t need to stress about building an emergency fund. All you have to do is choose how much you can consistently put aside each payday, automate it, and let time and compounding interest do the rest, while you get on with life.
4. Open A Separate Account
Is having money in the bank too tempting?
Use a separate account, with a different bank to your everyday account, to make it that little bit harder to access your funds and reduce the temptation to spend your emergency fund on non-emergencies.
The bulk of our emergency fund is actually our mortgage. We pay extra on our mortgage, saving us interest, but if we ever need to, we can redraw those extra repayments in an emergency.
Define Your Emergencies
It’s important to have a clear definition of what an emergency is so that you’re not dipping into your fund for everything.
Forgetting your mother-in-law’s birthday may seem like an emergency, but using your fund for everyday expenses will leave you short when you have a real emergency.
Have a chat to your partner and agree on what is an emergency and what isn’t. Only use your emergency fund for a true emergency.
6. Channel Extra Money Towards Your Emergency Fund
You can speed up your savings by putting bonuses and windfalls towards your emergency fund.
An emergency fund is essential for peace of mind. It doesn’t have to be an impossible goal – by saving what you can, consistently, each and every pay, and only using your fund in true emergencies, that peace of mind will be close than you think.
Melissa Goodwin is a writer and the creator of Frugal and Thriving who has a passion for living frugally and encouraging people to thrive on any budget. The blog is nine years old and is almost like her eldest baby. Prior to being a blogger and mum (but not a mummy blogger), she worked as an accountant doing other people’s budgets, books and tax.