5 Steps to Building an Emergency Fund: Save $6500+ in 6 months
Whether you're starting your first job or are new to saving, the first thing you should save for is an emergency fund. Having three to six months of expenses in your savings account can be intimidating. So, we're here to share five simple steps to create an emergency savings fund. Follow these tips and save over $6500 in six months.
Why Do I Need an Emergency Fund?
An emergency fund is money set aside in a savings account as a "rainy day fund." It'll help you during challenging times of unexpected costs or needing to take time off work. Setting aside money will give you peace of mind and prevent financial stress. An emergency fund shouldn't be invested in stocks or shares and should be easily accessible within a day.
How Much Should I Have in my Emergency Fund?
It's recommended to have three to six months of expenses in an emergency fund. This account should be separate from any other savings accounts you should have.
How to Start an Emergency Savings Fund
1. Calculate your monthly expenses
Create a budget for your monthly expenses. There are plenty of Excel and Google Sheets templates to help you.
On the left are Lizzy's expenses. She accounts for all her expected costs, totalling $2190 per month.
2. Calculate your monthly income
Determining your monthly income can be tough if you work casually instead of having one full-time job. If you're schedule or wage is inconsistent, estimate your average monthly payments.
Lizzy works in entry-level hospitality or customer service gigs. Her hours generally range from 35-40 hours per week, and her wage ranges from $18-22/hour. Let's take the average and say Lizzy does 38 hours per week at $20/hour. Then, her average income is $3293 per month.
38 hours x 52 weeks x $20/hour = $39,520 per year
$36,400/12 months = $3293/month
3. Create a savings goal
You don't want to create too harsh of a goal right away. So, we recommend starting with a goal of three months of expenses. You don't have to stop saving after you hit this goal. You can keep going or lower your monthly contribution and diversify your savings.
Lizzy's goal is to have $6570 in her emergency fund.
$2190 x 3 months = $6570
4. Automate your savings
Choose a reasonable amount to save per month. If you start over-saving, it's easy to get frustrated and take money out of your emergency fund. This will slow down the time it takes to hit your goal. So, to avoid financial strain, set a number that's realistic to you.
Start by subtracting your monthly expenses from your income.
$3293 - $22190 = $1103
So, in Lizzy's example, let's aim to save $1000 per month to give her some wiggle room. This is $500 per pay period (2 weeks).
You want to automate your savings into a high-interest savings account. Set bi-weekly contributions to a separate account. If you never touch the money, saving it is easier.
5. Stash your windfalls
If you get any tax returns, birthday presents, tips, or other income streams, put them into your emergency fund. These amounts can build up fast and quicken the time it'll take to hit your goal.
Lizzy got $500 in tips and $100 cash for her birthday and put it straight into her emergency savings.
Lizzy hit her savings goal of $6570 in six months!
This content is for informational purposes only and does not constitute financial, accounting, or legal advice, and shall not be relied upon by you in that regard.