How to Grow a Healthy Emergency Fund in 5 Easy Steps

Life is unexpected. We never know when the next emergency might creep up on us, so setting up a solid emergency fund to resort to when things get tough can mean the difference between financial stability and crippling debt. Check out this article for a few ideas on where to begin.

Life rarely goes as planned, despite our best efforts. People lose their jobs and get sick. Cars break down. Roofs leak and basements get flooded. No one likes to think about the worst case scenario; but when that scenario eventually plays out, we all wish we’d been better prepared. That’s what emergency funds are for: they allow you to cover for unexpected expenses without breaking the bank or disrupting your everyday routine.

I’m not particularly financially-savvy, so saving has always been a struggle for me. In fact, it took me years to understand how important it is to regularly set money aside and abandon my paycheck-to-paycheck lifestyle. In my early twenties, when I first started to manage my income, I used to think that everything I make was meant to be spent. I redirected whatever sum I had left after paying my bills towards fueling my reckless shopping habits. The fact that this dangerous behavior left me financially vulnerable and more likely to accumulate debt never even crossed my mind.

After a few years and many emergency expenses paid up via credit card, I’m finally able to say that I’m on the right path towards financial stability. I managed to grow a healthy emergency fund and I’m slowly paying down my debt. It wasn’t easy though, and there are many things I’ve learned along the way; including a few tips on how to make the entire money-saving process less dreadful. Here are five fool-proof steps to help you achieve your saving goals.

1.  Make a Plan

To increase your chances of being successful, start building your emergency fund with a specific end goal in mind. According to Avidia Bank, one-quarter of Americans have only $100 saved. “That’s enough to barely pay for one new tire or an emergency plumber for one-and-a-half hours of labor,” as bank representatives estimate. While your saving goal will depend on your income and current financial obligations, a general rule of thumb is to save enough to cover at least three months’ worth of expenses.

Figure out what that sum looks like and then determine how much you would have to set aside every week until you reach it. A good idea would be to keep this cash in a separate account, to be less tempted to spend it impulsively.

2.  Tweak Your Budget

Now that you know how much you need to save each week, adjust your current budget so that it mirrors your new savings goal. If you don’t have a budget yet, it’s the perfect time to draft one. When you have a clear spending plan, you’re less likely to spend money chaotically. I use Mint to track my expenses, a tool I highly recommend.

3.  Treat It Like a Bill

Once you’ve made your savings goals part of your regular budget, pay yourself first. Set up an automatic monthly/weekly transfer from your paycheck into your emergency fund. You know, just as you would with the electric bill or with a gym membership. Making the transfer automatically will help you steadily build your fund and prevent you from spending that money otherwise.

4.  Cut Expenses

Well sure, that would be great, but where should I start? The truth is that you’re the only one who’s able to decide what you can live without. I can advise you to eat out less often, work out at home instead of joining a gym, or get rid of your cable. Ultimately though, I’m not the one who needs to live with these adjustments. Take an honest look at your spending plan and carefully assess where cuts can be made.

As an additional tip, whenever you receive an unexpected amount of cash (like a tax refund or work bonus) redirect it to your emergency fund instead of spending it frivolously.

5.  Use It for Emergencies

You emergency fund should be for emergencies only. Don’t use it to pay from an impromptu trip, a new pair of jeans, or a gift for a friend’s wedding. I know it can be tempting, but you will just have to start over again. And as you’ve already figured out, building your financial safety net is not easy.

Growing an emergency fund shouldn’t be optional, especially since having money aside is a key part of a healthy personal finance situation. However, the problem is that many people find the idea of saving intimidating and get discouraged before even giving it a shot. Here’s the secret: think small. Whether you can save $10 per week or $100 per week, it’s still a start. After all, even the smallest sum can make a difference in case of emergency.