{"id":14723,"date":"2024-12-03T15:45:49","date_gmt":"2024-12-03T21:45:49","guid":{"rendered":"https:\/\/www.lexingtonlaw.com\/blog\/?p=14723"},"modified":"2024-12-02T17:45:57","modified_gmt":"2024-12-02T23:45:57","slug":"building-an-emergency-fund","status":"publish","type":"post","link":"https:\/\/www.lexingtonlaw.com\/blog\/life-events\/building-an-emergency-fund.html","title":{"rendered":"Building an emergency fund"},"content":{"rendered":"\n
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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law\u2019s editorial disclosure for more information.<\/a><\/em><\/p>\n\n\n\n

According to a 2024 survey, only about half of Americans<\/a> (56 percent of people) could pay a $1,000 emergency expense using their savings. This statistic becomes even more concerning when you realize emergency expenses can happen to anyone at any time. Most people experience financial difficulties in their lives, and that\u2019s precisely why financial advisors and financial planning experts recommend individuals build an emergency fund. The good news is that building an emergency fund is possible at any income level if you know how to start. It just might take some time, patience and commitment.\u00a0<\/p>\n\n\n\n

<\/a>What is an emergency fund?<\/h2>\n\n\n\n

An emergency fund is a personal savings reserve set aside for future unexpected expenses or mishaps. Emergency funds should always be available as liquid assets so you can access them at a moment\u2019s notice.<\/p>\n\n\n\n

<\/a>Why do I need an emergency fund?<\/h2>\n\n\n\n

While no one wants it to happen, financial hardships or enormous unexpected costs sometimes occur. For example, people are suddenly laid off from their jobs due to recessions<\/a>, their cars break down or they incur significant medical debts after an accident or diagnosis.<\/p>\n\n\n\n

Whatever the reason, the one consistent factor is that these are always surprises.<\/p>\n\n\n\n

Without an emergency fund, you might turn to dire solutions. The 2024 Annual Emergency Savings Report found that for many Americans, the only way to pay off an emergency expense is to borrow money. Approximately 21 percent of survey respondents said they would\u00a0finance the payment on a credit card<\/a> and pay it down over time, and 4 percent would turn to a personal loan.\u00a0<\/p>\n\n\n\n

These options aren\u2019t ideal, as you\u2019re left paying interest on your emergency bill, but it could be even worse for some. For example, some people may feel their only option is a payday lender, which would have very high interest rates. Or they might not be able to pay rent and be evicted.<\/p>\n\n\n\n

Whatever the case, even a small setback, like an unexpected bill, can often send someone spiraling into debt. An emergency fund is a shock absorber for life\u2019s unexpected difficulties.<\/p>\n\n\n\n

<\/a>How much money should be in my emergency fund?<\/h2>\n\n\n\n

There\u2019s some debate about how much an emergency fund should be. Ultimately, it\u2019s an entirely personal decision. For example, someone who does contract work or works for themselves may want to build a larger emergency fund because their income stream is less reliable than a traditional job.<\/p>\n\n\n\n

Ideally, you should have three to six months\u2019 worth of living expenses saved up. If you lose your job, finding a new position can take several weeks or months. You should have enough money saved up to comfortably handle losing your job or significant expenses.<\/p>\n\n\n\n

If you\u2019re currently working on paying off debt while simultaneously building an emergency fund, know you can start small. At first, build up three months\u2019 worth of living expenses. When your debts are paid off, you can focus on growing your emergency fund to six months\u2019 worth. <\/p>\n\n\n\n

<\/a>Where should I keep my emergency fund?<\/h2>\n\n\n\n

Ideally, you want to keep your emergency fund in a savings account. You don\u2019t want the money locked up in investments. It should be accessible immediately, without penalty. You can also make your emergency fund work for you by putting it in a high-yield savings account (HYSA) rather than a regular savings account, so it earns interest as it sits there.<\/p>\n\n\n\n

Another tip is to keep your emergency fund in a separate bank or account from your regular accounts. If you see your emergency fund every day, you may be tempted to dip into it for nonemergency situations.<\/p>\n\n\n\n

<\/a>How to start building an emergency fund<\/h2>\n\n\n\n

It may feel overwhelming to think about saving such a large amount. However, if you tackle it step by step, the process becomes a lot more manageable. Here\u2019s how you can start building an emergency fund in eight steps.<\/p>\n\n\n\n

<\/a>1. Set a reasonable goal<\/h3>\n\n\n\n

First, it\u2019s essential to set an end goal. When you know what you\u2019re working toward, it\u2019s much easier to track your progress.<\/p>\n\n\n\n

Decide how many months of living expenses you want to save up for. Consider factors like your job stability, the amount of your previous unexpected expenses and your risk tolerance. <\/p>\n\n\n\n

If this has been a costly year for you, you could start by building up three months\u2019 worth and then work your way up after that.<\/p>\n\n\n\n

Next, calculate your average monthly living expenses. We suggest opening all your accounts and combing through the last four months. This will give you a rough idea of how much you typically spend per month. Make sure to include only the bare necessities. Then, multiply your desired months by your typical monthly expenses and you\u2019ll have a goal to work toward.<\/p>\n\n\n\n

Ensure your goal is reasonable\u2014if you choose an unattainable goal, you\u2019re more likely to get discouraged along the journey.<\/p>\n\n\n\n

<\/a>2. Track your budget<\/h3>\n\n\n\n

Next, you\u2019ll want to figure out a budget and stick to it. You should have an amount you want to set aside for your emergency fund every month to meet your desired goal.<\/p>\n\n\n\n

Use an app like Mint or YNAB to track your money. That way, if you ever fall short of your goal, you can analyze your spending to see where you can cut back.<\/p>\n\n\n\n

<\/a>3. Make it automatic<\/h3>\n\n\n\n

If you receive direct deposits, you can set up automatic transfers to your savings. This will allow you to contribute to your goal regularly without thinking about it. You also won\u2019t be tempted to spend the money because you won\u2019t see it sitting in your bank account.<\/p>\n\n\n\n

<\/a>4. Put away any \u201cextra\u201d money<\/h3>\n\n\n\n

Throughout your year, there will be times when you come into some unexpected cash. This could be from birthday presents, bonuses or tax refunds.<\/a> Make a promise to yourself now that when you get this money, you\u2019ll put it into your emergency fund.<\/p>\n\n\n\n

<\/a>5. Sell something<\/h3>\n\n\n\n

Take a look around your home and see if there\u2019s anything you can sell. You might have clothes, old electronics or furniture you can get rid of. This extra income can help you build an emergency fund much faster (and simultaneously declutter your home).<\/p>\n\n\n\n

<\/a>6. Modify your expenses<\/h3>\n\n\n\n

Don\u2019t feel like you need to eliminate all discretionary spending. If you budget too aggressively, you might give up on the project. Instead, choose to eliminate just one thing, like eating out. A small change can add up over the months and help you grow your fund.<\/p>\n\n\n\n

Remember to take a look at your fixed expenses<\/a> to see if there\u2019s room for budget cuts there, too.\u00a0<\/p>\n\n\n\n

<\/a>7. Reward yourself (occasionally)<\/h3>\n\n\n\n

Building up a large emergency fund will require discipline and commitment. Over time, as you put all your extra money into your fund, you might feel discouraged.<\/p>\n\n\n\n

To avoid this situation, set mini goals along the way. As you achieve these goals, you can reward yourself. For example, every time you hit another 10 percent milestone toward your final goal, you could treat yourself to a movie night or a takeout lunch. This will give you something to look forward to along the journey.<\/p>\n\n\n\n

<\/a>8. Use credit repair to your advantage<\/h3>\n\n\n\n

Credit repair<\/a> can reduce financial stress and contribute to overall savings. As your credit improves, you can gain new advantages that can help you achieve your goal.<\/p>\n\n\n\n