Five Steps to Building an Emergency Fund

Read any book on personal finance or listen to any financial planner, and one of the first things you are taught is to make creating an emergency fund your top priority. Having a cash reserve set aside to cover six to twelve months of living expenses is essential to building your financial security. Yet, most people in the United States don’t have the cash to cover a car repair.

You can chalk it up to ignorance, laziness, or a lack of discipline because anyone with a steady income can create a sufficient emergency fund. All it takes is determination and a plan. If you are on a tight budget, it may also require an attitude adjustment about how you spend your money. Regardless of your financial situation, the first thing you need to do is imagine how much financial trouble you would be in if your income suddenly stopped for six to twelve months (longer if you have children) and then follow a plan to create your emergency fund. Here are five steps to follow:

Quantify your savings goal: The minimum amount you should keep in reserve should cover six to twelve months of living expenses. If your monthly expenses are $5,000, you would need $30,000 to cover six months or $60,000 to cover 12 months. Set a goal that includes a reasonable time frame for saving your desired amount. If you want to accumulate $30,000 within the next two years, you will need to save $1,250 a month. If that is not within your budget, you can adjust your time frame or find more money in your budget.

Establish a serious budget: Saving for your emergency fund should be your top priority, taking precedence over other short- and long-term goals. If the amount you need to save is not in your budget, it’s time to get serious about your spending plan. In listing all your monthly expenses, make your emergency fund savings amount the top line item, which you pay yourself first before all other expenses. If you have a shortfall, go through each of your other expenses and determine what you can cut to make up for the shortfall.

Automate your savings: Take advantage of your bank’s automatic deposit feature. Most banks have the capacity to automatically transfer funds from your checking account to your savings account. Saving is easier to do when you don’t have to think about it.

Keep it safe and liquid: Savings accounts aren’t paying very much interest these days, but you’re not doing this to make a killing.

Do not touch it: It doesn’t matter what you earn on your savings if you can’t refrain from tapping into it. Achieving any financial goal requires discipline and patience. Once you achieve your goal, you’ll have that monthly cash to apply to your other needs or goals.