8 tips for starting an emergency fund

Posted by on July 23, 2013 @ 1:00 pm in Personal finance

A few months ago, my husband and I experienced debit card fraud. Reviewing our bank account online, I noticed a series of strange ATM withdrawals that we didn’t make. The withdrawals were substantial, adding up to a few thousand dollars. I had frequently heard of people experiencing credit card fraud. In our case, there was a big difference. With credit card fraud, you can simply close the account and not pay for any unauthorized purchases. In our case, the money was actually gone from our account.

Luckily, our bank ended up providing full coverage, with no liability to us. (The bank did require us to meet certain stipulations, such as reporting the issue within 60 days.) Still, there was a period of time while the bank was investigating the situation when our account was unexpectedly short thousands of dollars.

For my husband and me, this completely unanticipated event brought home the importance of something that we hear about quite often—an emergency fund. In previous blogs, I’ve written about this concept as an important savings goal for young investors, but I have to admit this incident was the first time that I truly understood just how vital it is to have funds set aside for the totally unexpected event.

Recent research* indicates that about half of all Americans don’t have enough savings to cover three months’ worth of expenses, and almost a third don’t have any savings at all. For people in this position, and for young investors just starting out and living paycheck to paycheck, an unforeseen event—whether it’s a job loss, medical emergency, or completely random occurrence—can be incredibly distressing. Even if just for a very short time period (as in our case), having an available reserve of cash is critical to cover basic expenses and needs.

For those just starting to earn a regular paycheck, the natural question becomes, how do you possibly find the money to put away for an emergency fund, especially while facing competing goals like starting to save for retirement or paying off debt?

And how much do you need? It depends on your spending needs, but one rule of thumb is to have enough to cover at least six months of expenses—things like rent or mortgage, debt payments, food, healthcare, and transportation.

Here are a few ways to begin, or boost, your emergency fund:

  1. Start small. Even with just $50 per paycheck, getting into the habit of putting something aside on a regular basis is a great way to begin. Making it automatic through bank options or direct deposit will help you resist the temptation to skip a payment.
  2. Give up one small luxury. Think about something that you regularly purchase that you won’t miss that much—your daily latte, the premium cable package, car washes, or manicures. Put the amount that you save directly into your fund.
  3. Keep making payments. Finally done paying off your car? Redirect that monthly sum into your emergency fund.
  4. Avoid the impulse. Online shopping has made impulse shopping too easy. Is there something that you’ve got your eye on? Wait two weeks. If you still want it, then buy it. Chances are that you’ll decide against some of those expensive whims.
  5. Use cash. Studies have shown that consumers are less likely to spend when they’re putting down cash versus using a credit card. Small reductions in your spending habits can create additional savings for your fund.
  6. Sell stuff. Does your basement hold two sets of old golf clubs, like ours does? Sports equipment, clothes, gadgets, phones, or other devices can bring in a decent amount of cash online or in local consignment shops.
  7. Set a starting goal. Accumulating enough to cover six months of expenses might seem overwhelming; something is better than nothing. $1,000 might be a realistic goal for starting off. Once you achieve that, it might seem less daunting to work up to a higher amount.
  8. Separate it. If your emergency fund is too easy to access or mixed in with other savings, it’s tempting to reach for it for nonemergency uses. Create a stand-alone savings account or money market fund to store your reserve.

Once you’ve established the habit of saving, keep it up! Don’t stop once your fund is complete; now you can apply your savings to other long-term goals. What are your saving tips?

*Bankrate study, information from CNN article: http://money.cnn.com/2012/06/25/pf/emergency-savings/index.htm

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