When it comes to financial security, one of the most important things you can do is build an emergency fund. An emergency fund is money put aside, usually in a savings account, to cover unexpected expenses. These can be things like a medical bill, last-second travel, or car repair. Most experts advise saving enough to cover three-to-six months of living expenses. However, even a smaller cushion of $1,000 can be a vital step in creating financial stability and freedom. It is the first step of Dave Ramsey’s 7 Baby Steps financial solution.
Unfortunately, a 2022 Bankrate study found that more than half of Americans can’t afford a $1,000 emergency. Not being able to cover an unexpected expense can cause debt, financial stress, and delayed long-term goals such as retirement. Here’s how to build a $1,000 emergency fund, keep it growing, and create financial security.
What are the Benefits of an Emergency Fund?
One of the most significant benefits of an emergency fund is avoiding debt. If you have an unexpected cost and don’t have an emergency fund to cover it, you may have to put it on a credit card. This can lead to debt and high-interest rates, which can be challenging to pay off. If you are already trying to pay down current debt, not adding more is critical in achieving your goal.
Peace of Mind
An emergency fund can also give you peace of mind. Not having enough money to pay for unexpected expenses is stressful. Whether literal or figurative, we may encounter storms in our lives. And while we can’t predict what storms will be in our future, we can be prepared to handle the financial consequences. Knowing you have money set aside can help you relax and enjoy your life, knowing that you’re prepared for whatever comes your way.
Protect Your Investments
Treating these assets as an emergency fund may be tempting for those fortunate enough to have a retirement fund and own a home. However, loans against your home or withdrawals from your retirement have long-term consequences on your ability to retire comfortably and promptly. The cushion of an emergency fund protects your investments and future goals.
Make Progress Towards Other Financial Goals
Chances are you have other goals for your money besides paying for your basic needs and emergencies. Your wish list may include:
• Gifts for family and friends
• Charitable giving
• Activities for your kids
• A new car
• A larger house
• A college fund
These expenditures are difficult to save for when extra money continually gets tapped into for pop-up expenses. Once you establish an emergency fund, you can start putting aside money for more fulfilling goals.
Steps for Building an Emergency Fund
Building your initial emergency fund of $1,000 requires a plan to spend less and, if possible, bring in more money.
Photo: Pop Nukoonrat via 123RF
Step 1: The Plan
First, determine how much money you want to save and a reasonable timeline for reaching that goal based on how much you can put aside each month. For example, your goal may be to save $1,000 in 10 months by putting away $100 each month. Use this Consumer Financial Protection Bureau worksheet to determine the savings percentage that will work for you.
Next, open or designate a savings account to build your emergency fund. Consider opening an account with a bank that makes saving for different goals easy. Ally Bank offers buckets within the savings account to separate money into different goal areas. With Capital One 360, you can open up to 25 accounts for different savings goals.
Once established, it is essential to clarify acceptable uses for your emergency fund. Some emergencies will be obvious, like when your car breaks down and you need to repair it to get to work each day. Writing down a list of approved emergency expenses will help you avoid tapping into the account for costs and wants that should be in your budget versus emergency needs.
Step 2: Spend Less
Review your spending to identify areas where you can save. You might be able to cut back on your grocery bills with better meal planning, cancel a streaming subscription, or stop eating at restaurants as often. Practicing frugality is a great way to build your fund quickly.
Step 3: Make More
If you already live frugally or don’t want to cut back on current expenses, the other option is to bring in more money. Achieve this by picking up a second part-time job, freelancing, starting an online business, selling personal items online, or by asking for a raise. Reach your goal faster with a combination of spending less and earning more!
Are you ready to start building your emergency fund today?