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How to build an emergency fund

How to build an emergency fund

January 22, 2016

Planning for emergencies is like buying insurance: you pay into an account, and hope you'll never have to use it. But life happens. Cars break down. Roofs leak. Kids break arms. Having money in the bank to cover those unexpected expenses can reduce stress and keep you from relying on credit cards and loans to make ends meet.

Here are four ways to establish and maintain an emergency fund.

  • Start small. Is the thought of setting aside enough money to cover at least six months of expenses daunting? Then lower your sights. Set a realistic and achievable amount for your emergency fund and get in the habit of contributing regularly, even if it's only a small amount each week. Then don't touch the account except for real emergencies. Leave it alone and it will grow.
  • Make use of "found" money. When you get a bonus, cost-of-living adjustment, tax refund, or windfall, fight the temptation to increase spending. Instead, use a portion of that "found" money to bolster your emergency account.
  • Make it automatic. Set up routine transfers from your household checking account to a separate savings account. If allowed by your employer, allocate a portion of each paycheck to an emergency fund. Establish the account at a financial institution other than your usual bank. Why? If the money never shows up in your regular checking account, you'll be less likely to use it for everyday spending.
  • Sell stuff. Clear out your stash of surplus household goods, furniture, and clothing, and sell the items in yard sales, consignment shops, and online auctions. Direct the cash into your emergency account.

An emergency fund is essential to maintaining financial security. If you'd like more ideas for setting financial goals or building up your emergency fund, give us a call.