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- 5 Emergency Fund Tips: How to Save, Where to Keep & More
5 Emergency Fund Tips: How to Save, Where to Keep & More
In this hustle-and-bustle world we’re living in, unexpected expenses seemingly come out of right field each and every month. The more we save, the more we can’t get away from those rainy days we’ve been saving for.
That’s why it’s absolutely critical to make sure you set up an emergency fund and regularly contribute money to it weekly or monthly. An emergency fund can be the difference between having enough money to pay an unexpected expense immediately or having to put it on a credit card and going deeper into debt.
But what is an emergency fund and how is it different than a savings account? An emergency is strictly to be used for emergencies, but if you have too much money in it, you could actually be losing out on potential money.
We’ll break down what an emergency fund is, how it differs from a savings account, how to start it and some tips to keep it flourishing over time!
What Is an Emergency Fund?
An emergency fund is some kind of safe account (whether it’s a checking, savings or another low-risk account) you put money into on a regular basis.
This money can be used in unexpected, emergency situations, such as medical expenses, car repairs, broken-down appliances and other things like that which need to be paid for immediately.
How to Save for an Emergency Fund
While everyone saves and splurges in different ways, a few simple budgeting tips can go a long way to reduce your expenses and start saving a pile of dough each month.
If you avidly eat out every week, try cutting down the number of times you eat out each week slowly. For instance, if you typically average 10 meals of eating out each week, cut that number to nine or eight next week.
After you’ve gone two weeks, shave off another two times. Eventually, you’ll start saving a boatload of money and won’t even miss eating out.
If you’re an avid traveler who takes five trips each year, try cutting that down to three or four trips a year. In addition to these tips, just try to be more conscious overall about where your money is being spent, and make a conscious effort to put a large portion of that into your emergency fund.
How Much to Save for Emergency Fund
While there’s no set dollar amount you need to have in your emergency fund, the best rule-of-thumb is the more, the merrier. Having a few hundred dollars tucked away in an emergency fund is great for unexpected expenses, but having too much money in an emergency fund can actually be costing you money.
For instance, if you have $15,000 tucked away in an emergency fund, let’s say it’s in a high-interest-accruing savings account making just 0.05% interest, you’re doing a great job at saving. But you’re also cutting yourself short.
If you kept $3,000 of that in the same account and moved $12,000 into stocks, bonds or other fairly safe investments, you could be making about 7 percent per year, or around $840.
If you don’t tap into the bulk of your emergency fund for a few years and keep saving money, that number could easily triple or quadruple.
Ensuring the investments are safe and can be instantly cashed out in emergencies is critical to the nature of your emergency fund.
Emergency Fund vs Savings
While emergency fund and savings account are terms often thrown around in congruence with one another, they can actually be used in conjunction with one another. Emergency funds and savings account are extremely similar in that they’re both kept in safe, low-interest-bearing accounts.
But the reasons to tap into each are quite different. Say you want to purchase a home and you need money for a down payment. That payment will come from your savings account because it’s an expected purchase you’ve likely been considering for a while.
But if you have to take an unexpected trip to the hospital and rack up a $1,000 medical bill, that money should come from your emergency fund. There’s no need to tap into your savings for that, unless your emergency fund has insufficient means.
After taking money from either account, it’s important to remember it’s not a bad thing. You just need to work to replenish them again. Life happens. Money comes and goes, but it’s always better to save for a rainy day because the rain will come eventually.
5 Emergency Fund Tips to Get It Flourishing
1. Set a Savings Goal
The first and best emergency fund tip you’ll ever receive is to set a savings goal for yourself. This goal could be as minimal as saving $100 each month to putting aside more than $1,000 per month. The key is that you must set a goal for yourself in order to make it more attainable.
A great way to save money each month is to set up an automatic transfer from your checking account to whichever emergency fund account you decide on. That way the saving is pretty much done for you.
2. Cut Your Expenses
If you’re like the majority of people on this planet, you have a ton of expenses and can’t quite muster up enough money to make a substantial emergency fund deposit every month. Cutting expenses will help solve this problem.
Whether it’s forgoing those new shoes, booking one less tee time per month, going out to eat fewer times or something else, cutting your expenses is the quickest way to start saving some serious cash.
3. Round up on Purchases
In the days of paper-money dominance, people used to have change jars that would collect all their loose change each year. If you were lucky, you’d have a few hundred bucks worth of shiny coins in that jar at year’s end.
Nowadays, nearly every purchase is made electronically with a credit or debit card, so there’s no change to be had. Or is there? With round-up-savings apps like Acorns, you connect your bank account and the app automatically rounds your purchase to the nearest dollar and sends it to your savings account.
So if you decide to get that $4.35 cup of coffee, the app will round your purchase up to $5 and send the extra $0.65 directly to your emergency fund. For non-savers or people who have trouble saving money, this is a great way to begin!
4. Harness the Power of Tax Refunds
What do you claim on your taxes each year? If you’re like me, you claim 0 on your taxes so Uncle Sam takes the maximum amount from your paycheck every other week.
By doing this, you almost guarantee yourself a healthy tax return at the end of the year, which can be deposited directly into your emergency fund.
By doing this, you essentially trick your brain into saving money. You get used to the paychecks and when the tax return comes and you deposit it into your emergency fund, you can convince yourself that you never really had that money in the first place. After all, it was never in your checking account.
5. Get a Side Hustle
Still having trouble saving enough for an emergency fund? It may be time to bear down and get a second job you can work part time. In the gig economy, there are tons of ways to make extra money on the side.
From driving Uber or Lyft to contracting out your professional talents or showing off your skills behind the bar, a little extra income can go a long way.