Starting an Emergency Savings Fund

Starting an emergency fund is an important element of total financial wellness and should be just one part of a larger savings plan that includes retirement savings, everyday savings, investments, and ways to save for big purchases.

I sometimes find it easy to talk myself out of emergency savings, until I’m really key in on how a cushion of a little emergency cash has come in hand in totally unexpected situations. I think of emergency savaging as the cash that you build up as quickly as possible, then park out of sight, and feel comfort that if that rainy day hits you’re prepared.

Note that emergency money is different than unexpected or periodic expenses, which could come out of other savings pots depending on how your finances are structured. Instead, this savings is really about covering daily expenses should there be some one time and unexpected issue—think dramatic job change, car catastrophe, a health or medical bill that comes out of left field.

This is the three step process I went to to tackle starting my cash cushion.

1 | Estimate Expenses, Aim for Three Months

Three months of living expenses is a good round number to shoot for, though in high rent districts, this can be really challenging. Still, pushing yourself as far as you can in giving yourself this estimate that covers being able to sustain your lifestyle is really important.

This isn’t all about keeping a cushy life and not adjusting your expenses if times get tough, but chances are something that causes you to dip into your emergency fund is coming along with some other life chaos. You wouldn’t want to think about trying to get out of a lease if you can’t cover your rent, cancelling long-term contracts, selling a car, etc. if at all possible in what is hopefully a short term setback. Couched in those terms, emergency savings is a double financial win because you’re preventing other potential unexpected expenses from becoming more stressful in a time of crisis.

When calculating your ultimate savings goal, add up the essentials times three months. I figured that I could save the bulk of what I needed over a six month period, and divided that out by pay periods, making it an auto-transfer to another account over that period of time. The less you have to think about this the better and it’s more motivating to see the money in that separate account add up.

2 | Pay Yourself First to this Account for a While

It’s a little less fun to direct cash this way but I find it easier to fund a stash like this by directing all my savings effort there for a few months. When you’ve hit about 75% of your goal, then it might make sense to go back to contributing to other savings accounts like the money you set aside for vacation, etc. (That said, my retirement savings is a non-negotiable and the absolute essential place I pay myself first every month.)

3 | Keep It Fairly Close Hold

This is absolutely a chat to have with your financial advisor, but I like to keep this savings fairly liquid, in a regular old savings account or maybe a CD. The reason being for me personally is that if I’m counting on this money, I don’t want it tied up in a complicated investment product or fund that would cost me in fees to get out of. I also want to be sure that it’s in a relatively safe or FDIC insured investment so the value of this account isn’t changing too much over time. Yes, it’s earning a little interest, but my goal here isn’t so much making money off this money, but instead, making it work for me in a difficult time.

Do you have an emergency fund? How long did it take you to save what you needed?

*None of the information provided is investment advice or intended to constitute an investment recommendation or strategy for a specific person. Please discuss all investment and financial matters with your personal advisors and financial professionals.