Building an Emergency Fund (3 Minute Debt Break)

If you ever asked yourself “How Do I Build An Emergency Fund”, you’re already on your way to better financial health. Recognizing unexpected costs happen is a good first step. The next step is to plan to have the systems and resources in place to successfully navigate a financial situation when one occurs.

The first thing you need is a good, well-planned budget, with a clear line item outlining funds to be used for emergencies only. Most financial advisors will recommend your emergency fund have at least enough money to cover your core living expenses for between six and nine months. A word of caution… this will be a large number, but it’s also a long-term goal. You don’t have to get there all at once. Building your emergency fund is a process much like saving for retirement, a mortgage down payment or any other large purchase.

So, how much of your surplus income should go to your emergency fund each pay? Financial emergencies are unpredictable and can happen at any time, so it’s a good idea to build that fund fairly quickly. Consider contributing up to 50 percent of your monthly income, less expenses to the emergency fund until you reach the desired goal.

Put the remaining 30 percent toward your retirement, and 20 percent toward your other savings goals respectively. Once you have reached your set goal in the emergency fund, you can then divide your surplus funds between your retirement savings and your regular savings. 

It’s important to keep your emergency fund separate from both your regular spending accounts, as well as any retirement funds or savings you’ve also budgeted. Each of these accounts has a specific job; mixing them together can cause confusion and make it easy to use funds outside of their intended purpose.

Consider setting up your emergency fund at a separate institution from where you do your regular banking. This keeps the funds at arm’s length from your regular spending, but readily available should you need them. If you are able, set up an automatic e-transfer each pay period. That way, the transfer is guaranteed to occur and you won’t even notice you had the money in the first place.

While you’re doing all this saving, keep track of life changes! Life is constantly changing and so are your financial needs and means. Set time aside every month to review your budget and make sure it is still working for you. Then, with your budget moving along smoothly and your savings accounts all set up, you’re well on your way to being prepared for life’s unexpected changes. Give yourself another pat on the back. Take some time to relax and enjoy the feeling of knowing you’re financially prepared to face whatever challenges come your way. 

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