If you suddenly have to cover an unexpected expense, such as a car repair, or you want to take off some time between your old job and your new job without worrying about your living expenses, would you feel panicked or prepared?
More than half of all Americans dread covering a gap in income or a sudden financial hardship because they don't have enough savings to manage a financial emergency. In the back of your mind, you know you should be saving for a rainy day, but hoping that life will always be sunny probably isn't the money management strategy that will keep you from stressing out when the storm clouds gather.
Whether you call it your rainy-day fund, your emergency fund, or just your savings account, having a resource of cash to handle the financial surprises of life can keep a road bump from turning into a sinkhole. If you're wondering why it's important, or even how to get started saving, today's the day to start building your financial umbrella.
Why you should save money for an emergency fund
You can be responsible and try to do everything right when it comes to your budgeting and spending each month, and still find yourself stuck with a huge bill you didn't see coming. That's why it's important for everyone to save money for an emergency fund.
It isn't just your financial health that takes a hit when you have unexpected emergency expenses and not enough money to cover them. Your mental health recognizes a real sense of uneasiness, urgency, or maybe even panic, as you try to figure out how to manage both the unexpected expense and your everyday living expenses.
Unlike a vacation or a new appliance, an emergency situation isn't an optional expenditure — you can't say, "No," or "Maybe next year." It's usually a here-and-now expense. Considering that a financial emergency isn't optional, saving for one should be as important as any other budgetary expense.
Many people plan for an emergency payment by taking on debt, which results in spending more later. Having an easily accessible financial resource you've worked hard to save can help solve your unexpected expense problem and avoid financial hardship later.
How much money you should save
Just like saving for retirement, saving for a financial emergency will vary for everyone. For example, if you need to travel to help care for a family member, the expense would be different than if you have to drive two hours or for two days.
Experts will recommend building up at least $500 to get a cushion in your budget in case of a sudden financial hardship, but a better dollar figure is to look at your budget and your resources and ask yourself: If you had to pay $300 or $500 or $1,000, what would be possible and what would be difficult? That's probably a good place to set your initial savings goal.
Another strategy might be to estimate how much money it would cost to repair or replace a must-have appliance or vehicle. If you needed to travel urgently, what would it cost to buy an airline ticket or rent a car? Look at past expenses and use those as a gauge to start saving.
A third estimate would also be to look at your average income. If a natural disaster shuttered your place of employment, or if you needed to take extended time off to care for an elderly parent, how much money would you need to cover living expenses for a week, a month, or longer?
Consider these estimates your starting point — the minimum amount you want to add to your emergency savings. If it's unlikely you can set aside that money quickly, don't worry. That's why most emergency funds are built up over time, so keep saving.
How you can start your emergency fund
For starters, you need an account where you can get to your money in an emergency, but not combined with your daily source of payments for groceries, bills, or other everyday expenses. A savings account is the easiest option, especially if you plan to start small.
If you have a chunk of change, like a sudden windfall or a tax refund, these are a good way to kickstart your savings. Find a bank or credit union that pays interest on your savings account and doesn't require a large minimum balance. You'll want it to earn interest, but to get started, it may not pay big dividends. The important starting point is to have a place to keep your emergency fund handy, but separate from your spending account.
While it's smart to have a goal so you know how much to save, start by creating small, short-term goals. Consider how much you can save each month, or each pay period.
One of the easiest ways to reach those goals is to automate your savings. You can adjust your direct deposit to have some money go directly into your emergency savings — that's an easy way to keep your savings out of sight and out of mind. You can also schedule regular transfers from your checking account to your savings account so that you are adding to your emergency funds regularly, like any other monthly payment.
If you know you are motivated by positive reinforcement of your efforts, use your mobile app or online banking to send weekly or monthly notifications about your savings balance. When you see the number climbing each month, you'll feel better about the future knowing you'll have financial assistance when a surprise expense shows up.
More emergency fund options to consider
If you are a student, your college may also offer a student emergency fund to help with sudden financial hardships. Many employers also have programs to help with financial assistance, including donating vacation time to co-workers when they need to tend to a sick family member.
It's a good idea to not rely on these options as your only emergency fund plan, but knowing there are additional possibilities may help when an exceptional emergency situation arises.
Another smart way to build an emergency fund for medical expenses is to contribute to your health savings account, or HSA. The funds can be deposited pre-tax when used for medical-related expenses. If your insurance is provided by your employer, they may also contribute to your HSA and increase your medical emergency fund.
How you can grow your emergency fund
One of the best ways to help your emergency fund grow is to increase your contributions whenever your budget allows.
If you decide to cut out a specific subscription service, plan to add that amount to your savings. If you get a cost-of-living raise at work, consider increasing your savings by a dollar a day.
Some checking accounts provide automatic roll-up to savings options, so if you spend $18.50 at the grocery store, it will automatically add 50 cents to your savings account. Rewards checking is also a smart way to add extra money to your savings each month.
When you do get those extra bits of unexpected money, whether a rebate you earned after a purchase, your tax refund, or a spot bonus at work, add it to your emergency fund. Sure, it's fun to spend those surprise influxes of money, but it's also fun to not stress about unexpected emergency expenses.
Start saving no matter what the weather looks like
If you don't have an emergency fund yet, don't freak out. But also, don't wait for a rainy day to wish you had a rainy day fund. Start saving, or increasing your savings, today.
Remember, it's never too late to start saving money. Kasasa writes about saving a lot, so review some of our top saving posts to help you get started:
When life throws a financial surprise your way, consider how good it will feel to have emergency funding ready to help you make those clouds go away.