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5 steps to building an emergency fund

Tips to help you be ready for unexpected expenses

Having some extra funds available for emergencies is an essential component of your overall financial well-being, with enough cash to cover three to six months of expenses being a common recommendation. For many people, though, that can add up to an intimidating number — and can discourage even the best-intentioned saver.

But don’t give up before you start! The game of saving is mostly psychological — and you can win it. Even if you’re starting from zero, regularly setting money aside — even in small amounts — will eventually get you to your goal. It just takes time and a little discipline.

If you’re ready to begin — and especially if you think you can’t — here are five suggestions that might make building your emergency fund easier.

1. Set several smaller savings goals, rather than one large one

Set yourself up for success from the start. Rather than shooting for three months’ worth of expenses right away, shoot for one month. Or two weeks. Whatever it takes to make your first goal seem doable.

Reaching that first goal can give you the motivation to keep going. Set your second goal higher — and the third even higher. By then, saving will have become a habit, and the positive motivation you’re building by reaching the smaller goals will help propel you toward larger ones.

2. Start with small, regular contributions

Set your initial contribution level at a relatively small amount. That will ensure you don’t stress your cash flow, making it too easy for you to rationalize abandoning your savings routine.

Find something in your life you can live without, or with less — trim back the monthly coffee habit a bit. Pass on that new pair of shoes, or one big night out.

Choose that amount — whether it’s $5 or $100 — and commit to saving it at regular intervals: per month, per week, or per paycheck. The key is that it needs to become a habit, not a recurring struggle.

3. Automate your savings

Out of sight, out of mind: the easiest way to save money is never to touch it in the first place. Most employers provide direct deposit, and some will even deposit to more than one account. 

Set up a separate account just for your emergency fund and have your chosen contribution amount deposited automatically, either by your employer or your bank.

Use a savings or other type of account that you can’t access easily, unlike a checking account. Chances are you won’t miss it. And don’t watch the account balance continually — that will only make growth seem smaller and slower. Forget about it and let time do its thing.

4. Don’t increase monthly spending or open new credit cards

Once saving has become automatic, don’t be lulled into a false sense of financial security and let spending creep up again. For example, if you gave up a new pair of shoes every month only to replace it a couple of months later with a new monthly shopping habit, you’re not saving at all!

If you still have an extra $50 left over each month, maybe your savings deposit amount is too low. If you don’t have an extra $50, you may be running up a credit card balance. Neither is productive. You shouldn’t stop enjoying life while you build your emergency fund, but you shouldn’t lose sight of its importance, either.

Having an adequate emergency fund is critical to your financial well-being. Be realistic, but try to reach your ultimate savings goal as fast as you can. That alone might make life more enjoyable.

5. Don’t over-save

Or, more accurately, don’t devote too much of your savings to your emergency fund.

By definition, an emergency fund is cash you can access quickly. That means you are most likely storing it in a low-yield vehicle like a savings account that is earning an extremely low rate of interest.

For that reason alone, you should stop contributing to that account once you’ve reached your ultimate goal. Start depositing into an account where it will start earning money on its own — ideally, your retirement accounts, where time will enable it to bear the most fruit.

Balancing debt and your emergency fund

If you are in the process of paying off high-interest loans or credit cards, be sure to balance your desire to accumulate an emergency fund with your need to get out of debt.

It’s important to save for emergencies, but every day that you’re still in debt is costing you money. What you’re saving in one account could end up being cancelled out by the interest you’re being charged in the other.

Instead, you may want to set a more modest emergency fund goal at the start and put any additional amount you can toward your debt. Once that’s retired, you can accelerate your emergency fund savings and raise that goal. In the meantime, having a small cushion is better than having no cushion at all.

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