Building An Emergency Fund: Getting Started

Building an emergency fund is like eating healthy. It’s good for you long-term and it can help you feel better, but it can also be tedious, demanding and just not fun. You would probably rather eat macaroni and cheese and donuts than a salad every day, just like you would rather spend your money on a vacation or concentrate on paying off debt (also while eating macaroni and cheese and donuts).

Well, just like weight and other related health problems are an issue in this country, so is not having enough money tucked away in savings. According to a report by the Federal Reserve Board’s Division of Consumer and Community Affairs, 47% of Americans cannot afford a $400 emergency or unexpected expense. Let’s look at some sudden expenses that could cost around $400:

  • Replacing a flat tire on your car
  • A pet or child’s medical expense
  • Your furnace breaks down and needs to be fixed
  • Your child away at college suddenly needs a plane ride home
  • A baseball flew through your living room window and you need a new one (Hey, it’s possible.)

Being able to cover these types of expenses is an important part of being financially well, and so is being able to afford a more drastic emergency like a job loss, death in the family or sudden need to move.

Now, saving money for unexpected expenses isn’t always easy, especially if you are also trying to save for something else or you’re trying to pay your other bills. After all, it’s easier to imagine the tangible future endeavors that are likely to happen like a car or home purchase, or the day you finally pay off your credit cards, rather than a might-happen-but-who-really-knows type of event.

But, an emergency savings allows you to know you can take on anything life throws at you, giving you peace of mind and relieving any anxieties you feel about your finances. It’s all about having the right mindset and staying motivated!

So, how exactly do you start building an emergency fund?

Breathe and ease your way into it.

Most financial advisors recommend having enough money to cover three to six months of expenses in your emergency savings account. Coming up with this amount of money seems like a big task, because in reality for most of us, it is.  But, no one is saying you have to save this overnight. Start with a small goal first.

It’s like knowing you have to lose 25 pounds, but understanding it’s a journey and not an “I’ll eat a salad for lunch and lose 5 pounds” kind of deal. It takes work. What is your short-term savings goal? Start with something like $250 or $400. Then, come up with a realistic timeline for accomplishing that goal.

Take a look at your budget as it is now and see if there is any room to save just a small amount. It can be as little as $5 a week, or if you can go higher, consider $10 or $20. Remember, any amount counts! If there really is no wiggle room, see where you can cut some of your expenses. Request a decrease in your credit card interest rate, or even consolidate to get one credit card payment. Call your cable company for information on a different package and look into other insurance companies or cell phone plans. It’s all about making small changes and taking baby steps to build the habit of saving towards your emergency fund.

Open a separate savings account for your emergency fund

You will need a new savings account to house your emergency fund. You don’t want to mix it with another savings account because you may be more likely to spend it or lose track of how much you actually have saved for emergencies. You also want to make sure you’re getting the most out of your new account with a high interest rate. For example, Jeanne D’Arc Credit Union’s savings account options offer 7.00% APY* on the first $500 you have in your primary savings account. That means if your savings reaches $500, you will earn an extra $35 each year just for having money. High-interest earning savings accounts always go a long way in helping you build and maintain sufficient savings.

Use direct deposit.

If your employer offers direct deposit, take advantage! Direct deposit is not only convenient because your paycheck gets deposited right into your account on pay day, but it’s a great savings tool. You can split your direct deposit so a certain amount of your check goes into different accounts. If your plan is to save $10 from each paycheck, you can set up your direct deposit to put $10 in your emergency savings and the rest in your checking or other accounts. Direct deposit also helps because it doesn’t give you the option to cash your check. It’s already in your account and more likely to stay there. This is a perfect way to make your savings automatic.

Set up automatic savings transfers.

Another way to make your savings automatic is setting up automatic transfers. This can help if you don’t have the direct deposit option or choose not to split your paycheck between accounts. You can set automatic transfers to transfer money from your checking account to your savings account on a certain day of the week, certain day of the month, every other week, whatever works for you. Automatic transfers make it easier to stay on track because you don’t have to remember to manually make the transfer. Once it’s done, it’s done. You don’t even have to think about it. So, if your plan is to save $5 each week, you can set your transfers to move $5 into your emergency savings account every Friday. Before you know it, the month is over and you have $20 saved. That’s $240 at the end of the year!

Keep making goals.

Once you’ve been saving for a little while and feel like you’re on a good roll and have the hang of your savings process, be sure to keep evaluating where you can enhance your saving power and set bigger goals. You can increase your monthly saving amount or expand your overall goal a little more. Always keep tabs on your progress and make sure you’re being consistent to get where you want to be.

Do you have a story about how your emergency savings came in and saved the day? Let us know in the comments section below!

*APY=Annual Percentage Yield.  7.00% APY will be paid on the balance in your account up to the first $500.00. A dividend rate of 0.15% APY will be paid on the remaining balance in your account that exceeds $500.00, with a $500.01 balance earning a 7.00% APY and a $1,000.00 balance earning a 3.697% APY, as examples. Requires a $5.00 minimum balance to open the account. Fees could reduce earnings. All new Jeanne D’Arc Credit Union members will have one of their consumer Savings Accounts (except Retirement Statement Savings and Money Market Savings) automatically designated as their Primary Savings Account to receive these special terms. Additional Savings Account established under the same member name, and related tax identification number, are not eligible for these special terms.

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