Financial experts often tell consumers to have an emergency fund but few tell you exactly how to create and maintain one. However, next to getting out of debt, nothing is more valuable for your financial future. Here a few steps you need to consider as you look to build an emergency fund for your household.
Start Small
Building an emergency fund can seem like an insurmountable mountain to climb. It is doable, however, even on an extremely small budget. The key is to start small. If you are only able to put aside $10 a week, do it. In fact, that $10 will build up to $520 in a year’s time. What looked like measly pocket change can turn into a big chunk of change in a short time.
The goal early on in this process is not as much the amount, as it is to just start the process and develop the habit. As you make other cuts in other areas or raises roll in from work, you can increase this amount later. At this point, sit down and figure out what you can reasonably afford each week at this point in time.
Automatic Deduction
Let’s face it: even the most self-disciplined person in the world would be tempted by unused cash sitting in their bank account. That’s why it’s important for the amount you determine, big or small, that goes towards your emergency fund be taken out each week without question. Do it before you pay your bills or go grocery shopping. Even better, set up a payroll deduction that automatically goes into a savings account for your emergency fund. You will not miss the money, but it will be waiting for you when you need it.
Reduce Expenses and Save the Extras
Do a thorough examination of your budget. Chances are, if you look very hard at each place you spend money each week, you will find one or several places you can eliminate or greatly reduce your expenses. Don’t just let that money slip into a budget black hole. Take the extra money and apply it to your emergency fund.
Pay Your Debt…Even After It Is Paid Off
Getting out of debt is an important part of good financial health. While putting a small amount towards an emergency fund is still important, you should focus most of your financial effort on getting out of debt. When your focus is there, it will be reduced much more quickly.
When the debt is finally is paid off, don’t stop! If you were spending $300 a month towards debt, transfer that same amount to your emergency fund once your debt is completely paid off. It is all too easy to funnel that money into another expense once the debt is gone. Resist that temptation and focus your efforts on your emergency fund until you get it at a level you wish.
Set a Lofty, Achievable Goal
You will get as many suggestions of what an ideal amount for an emergency fund should be as people you ask. But the general rule of thumb for your long term goal for the fund should be at least 3 months worth of your income. Even better would be 6 months or 12 months of your income. However, in the beginning a small goal is best. Once all of your debts are paid off, a loftier goal is in order.
Setting up an emergency fund can be done even on the smallest of incomes and budgets. With a little dedication, even in the midst of debt, an emergency fund can be set up and easily maintained. By setting small goals and gradually increasing them, an emergency fund is achievable.
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