Building an emergency fund is one of those things that no one really wants to do but they know they have to do it. There are lots of reasons to have one: an unexpected job loss, emergency medical expenses, a natural disaster, an appliance breakdown, auto repairs — the list goes on and on. You want to be as prepared for these things as possible, which takes effort and requires planning. Whether you’re starting a fresh fund or rebuilding a depleted one, here are some tips that will not only make the process much simpler but also a little less intimidating.
1. Evaluate (or re-evaluate) your budget.
The first step in building an emergency fund is to take a look at your budget and see how much money you have to play with. If you don’t have a budget, now is the time to make one. Keep it simple by subtracting your mandatory monthly expenses (things like rent or mortgage, bills, loans — pretty much anything with a due date) from your monthly income. The difference is what you can use to spend on entertainment, shopping and other things that you don’t necessary need. If you have a substantial amount leftover, that’s good — it means you can use a lot of that to put toward your emergency savings fun. If you don’t, that’s OK, because you can…
2. Figure out how to cut back.
Devise a plan to lower some (or all) of the expenses in your life. Lower your grocery bill by creating weekly menus, make dishes that you can freeze and eat again and again, and stick to your list. Be smart about your phone and cable bills — bundle your cable services, and only sign up for packages you know you’ll actually use. Determine whether you’re really using that monthly membership, and cut the cost by walking or jogging outside instead.
Even if you’re working with a salary on the lower side and you’re already struggling to make ends meet, you can still contribute to an emergency fund — you just have to…
3. Start small.
You may have read or heard that it’s important to have six months’ or even eight months’ worth of living expenses saved in your emergency fund. While this is ideal, it’s simply not probable for many of us. Rather than beating yourself up about being unable to achieve such a large target goal, lower your standards. Set a small goal at first, maybe just $500 or $1,000. Determine how much money you can put toward that goal each month (that’s where tip No. 1 comes in). As your income increases, your monthly emergency fund contributions should, as well.
4. Set it and forget it.
Set up direct deposit so that a portion of each paycheck goes directly into your emergency fund. Think of it this way: You can’t miss what you never knew you had.