One of the most important personal finance basics is the emergency fund. An emergency fund provides a back-up source of funding that you can draw upon when you have unexpected expenses, or if you end up losing some portion of your income. While an emergency fund probably won’t solve all of your money problems, it can be quite helpful in easing the situation. Here are four steps that can help you get started with an emergency fund:
1. Evaluate Your Finances
The first thing you need to do is track your spending and evaluate how much you could set aside each money for savings. Look at your financial situation, and think about where you are wasting your money. Make a note of where you could cut back so that you had some money to put in an emergency fund.
2. Open a High Yield Bank Account
Your next step should be to open a high yield savings account. Online is a good place to start. In many cases you can get a savings account that is linked to a checking account. This will allow you to transfer money from your savings account instantly to a checking account. Then, you can use a debit card to access your money.
Unlike investment opportunities such as stocks and shares ISAs, where your money is less readily available, a high yield savings account will help you make the most of the cash you end up putting into your account. Look for a financial institution that does not have fees or account balance minimums. You often have to start with at least $25, though. Open your high yield bank account, and start putting money in it.
3. Start Small
You don’t have to start big; most people can’t just start out putting $1,000 a month in a savings account. The important thing is to get into the habit of looking for ways to save money, and then put those savings in your emergency fund. Even if you only put in $25 or $50 a month, you are at least developing a good money management habit.
4. Increase the Amount
After you have established the habit of putting money into emergency savings, you should work toward increasing the amount you set aside. This might require shifting some of your spending habits, and cutting back a little bit. You can also automate your savings so that money is automatically transferred into your high yield savings account, or you can have the money taken from your paycheck.
Increasing the amount you set aside will help you reach your emergency fund goals of six to nine months of expenses faster. Once you reach your emergency fund goal, you can think about putting the monthly payment amount toward extra retirement savings or some other goal.