An emergency fund is a cash that you’ve saved for one purpose: to help you cope with the unpredictable emergencies that life hands you without disrupting the everyday routine. It could be for an accident or a health issue. With your fund, you have room to breathe. You don’t have to panic if you have to visit the hospital emergency room, or your car breaks down, or the hot water heater blows.
The key, however, is to leave the emergency fund completely alone until you need it. Deposit your money, let it earn a little interest, and ignore the balance until an actual emergency occurs.
Best short-term methods for building an emergency fund
In the short-term, take small steps. Start by setting a reasonable goal. Plan to have an emergency fund of say $300 to $500. That’s a goal that you can reach in a few weeks if you have a good income, and it can make a huge difference when you have an emergency.
With the goal set, the next step is to plot your moves to accomplish it. If you can save $30 to $50 a week, you can have a $300 to $500 emergency fund in just ten weeks. That becomes your overall scheme.
Plan a realistic savings program at first, both in the amount you can save each week and the overall amount. Make it a challenge, but not an unreachable number.
There are plenty of ways to come up with extra money throughout the month. Just consider these suggestions:
- Shave unimportant spending
- Negotiate a rate reduction on your credit cards
- Set up a carpool
- Shop around for better auto insurance
- Same for homeowners insurance
- Install a programmable thermostat
- Use a list for grocery shopping
- Plan only one special outing a month
- Get a roommate
People often want to spend the bits of unexpected money resulting from these economies without thinking about it. Don’t do it. The important thing is to hold on to these hard-won savings, instead of just spending them on something else. If you find that you’re actually saving more than $50 a week with this method, put more into the emergency fund, or pass it on to your retirement savings.
Making your savings automatic
Once you’ve trimmed $50 a week from your spending, you can set up an automatic savings plan to move that money straight out of your checking account and into the savings account you’re using for an emergency fund. If you have online banking, it’s pretty easy. Set up an automatic plan to shift $50 a week into savings, and then forget about it.
Set up an online savings account
It’s a good idea to set up an online savings account at a bank that’s different than the one you normally do business with for your emergency fund. Doing this lets you shop for good service and good rates, earn higher interest on your funds, and forces you to put the money in a place that’s not quite so easy to access. If it’s a savings that’s not linked to your ATM card, you would have to authorize the transfer, which may take a day or two. You could even set up automatic deposit of your paychecks each month with a predetermined amount set for savings.
Take a look at which banks are offering the highest interest rates: