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5 steps to building an emergency fund

Tips to help you be ready for unexpected expenses

Some financial experts say you should keep an emergency fund with enough cash to cover three to six months of expenses. For most people, that can add up to an intimidating number that can discourage even the best-intentioned saver.

Don’t give up before you start! This game is mostly psychological and you can win it. The fact is, 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 consistency.

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 many 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, shoot for one month. Or two weeks. Whatever it takes to make your first goal seem doable.

Reaching that first goal quickly can give you the positive motivation to keep going. Set your second goal higher and the third, higher still. 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, thus making it too easy to rationalize abandoning your savings strategy.

Find one thing in your life you can live without — one less impulse mocha, new pair of shoes, or dinner out each month. Choose that amount — whether it’s $50 or $5 — 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 conscientious 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. If your employer doesn’t offer direct deposit, most banks and credit unions do.

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 that monthly dinner date only to replace it a couple of months later with a new monthly bowling night, 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.


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