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Emergency Savings Fund: What it is and how to build it

An emergency savings fund can help you actively prepare for an unexpected event or expense that may come your way.

According to a recent survey, only 39% of Americans said that they could pay for an unexpected $1,000 expense with their savings.1 In a separate 2017 survey, 44% indicated that they could not cover an unexpected $400 emergency expense without borrowing or selling something first.2

It can be all too easy to ignore that you may be in financial trouble should something unexpected come your way. However, it’s imperative to actively prepare for such situations. An emergency savings fund operates as a sort of lifeline that you can utilize when an unexpected event or circumstance occurs, forcing you to seek financial help likely beyond your regular checking or savings accounts. It can also help prevent you from going into debt to cover the expense, whether by accruing credit card debt or by seeking other methods of paying for the expense.

You may be thinking, “well, I’m sure I have enough in my savings account to cover anything that comes my way.” You may be correct—however, an emergency savings fund is ideally meant to be kept separately from your regular checking and savings accounts. While you are certainly able to organize your various bank accounts however best fits your needs, the purpose of keeping an emergency savings fund apart from your normal, everyday accounts is to reduce the temptation to pull funds from it on a whim.

Everyone should have an emergency savings fund. Life doesn’t often give you a heads up before sending a curveball your way—you may have no idea your furnace is about to give out in the middle of the winter, or that your employer is planning on announcing layoffs. An emergency savings fund can’t help with the stress that comes with dealing with whatever situation you’re dealt, but it can certainly help alleviate some serious financial woes.

How to get started

A helpful exercise in starting an emergency savings fund is to first identify why you need one and what it will be used for. If you are doing this together with your spouse, partner, family, etc., think about this together and establish some parameters around what this money could be used for. This list could include anything from unexpected medical expenses to car- or housing-related expenses to the sudden loss of a job and much more. Keep in mind—this should be used exclusively for unexpected expenses that are critical to the overall well-being of you and your family. If you are worried about being tempted to use the funds for other expenses, make a list of items that would not warrant making use of it. Setting up some guidelines now can help instill a disciplined mindset that will be useful later on.

The next step is to determine how much you’ll need to save. The general rule to follow is 3 to 6 months’ worth of living expenses but this can vary depending on your personal situation. To calculate how much you’ll actually need to save up, start by reviewing your monthly budget. If you don’t have a budget, review your bank account statements over the last several months. From there, calculate all of your recurring, fixed monthly expenses—rent or mortgage payments, utility payments, internet, and phone payments, insurance payments, car payments, debt payments, and anything else you know that you will absolutely be paying each month. Then, add up how much you spend on other more variable, yet still regular, monthly expenses—groceries, gas, any subscriptions you may have, and so on. Lastly, add up how much you spend on other highly variable items on a monthly basis—going out to eat, coffee runs, entertainment, shopping, and anything else that you notice a pattern of in your budget. Once you have all 3 numbers, add them all up. This is roughly the amount that you spend on a monthly basis. Of course, this will very likely vary depending on the month, yet it will still give you a good estimate of how much to budget for on a month-to-month basis. Lastly, multiply this number by the number of months you will strive to save for—for example, multiple by 3 to calculate 3 months’ worth of savings.

The final number you calculate may seem overwhelming. Perhaps you are struggling to save money as it is and don’t foresee a way to get to your ideal emergency savings amount. However, an important thing to remember is that something is better than nothing. If you calculated that you should be saving $10,000 and it’s difficult to wrap your head around that number, instead strive to save $1,000. Break your savings goal into more achievable numbers and start there. Once you start hitting your goals, it will be more motivating to keep your momentum up and eventually achieve what you aspire to.

Learning to save more money

Figuring out how to save more money isn’t the easiest task. The best thing to do is to settle into a routine so that the action of saving money becomes habitual, rather than an afterthought. Both the savings goal you’re striving for and how you’ll get there will vary completely upon your individual situation. If you are feeling overwhelmed or anxious at the prospect of mapping out how to save for your goal, a financial advisor can be an excellent resource.

Here are 3 ideas to help get you started:

  1. Budget. If you don’t already have a comprehensive budget, take this opportunity to create and maintain one. A budget is the best way to stay in control of where your money is going. Keeping up to date with it can help you become more mindful of your money and adopt more disciplined spending habits.
  2. Make it easy for yourself to save. Many banks offer programs that you can enroll in where with every financial transaction you make, $1 (or another amount) will be transferred into your savings account. While you may not notice the absence of an extra dollar from your checking account, it will certainly add up over time in your savings. In addition, set up regular transfers from your checking to savings account. Set this up according to whatever works best for you—whether it is a $5 transfer every day, $50 every week, or something else. Setting up automated transfers is a great way to ensure the money will get into your savings while reducing the temptation of spending that money.
  3. Find small ways to build up your savings. Make a mental rule that any money earned outside of your regular income (tax refund, bonus, gift money, supplemental income, etc.), will go toward your emergency savings fund. Even if these contributions are sporadic and/or small in their amounts, they will eventually start to add up.

Other considerations

If you do have to utilize your emergency savings fund for its intended purpose while in the midst of trying to reach your savings goal, don’t panic. This is what the fund is for—to cover unexpected expenses. Even if your fund took a substantial hit, keep your savings efforts going and work towards replenishing it.

Once you do hit your desired savings goal, keeping up with it is important—yet it is also important to balance your savings efforts with your other financial goals and priorities. While saving “too much” isn’t necessarily a bad thing, your money may be more useful elsewhere, such as your retirement savings account, college savings fund, saving for a home of your own, paying off any existing forms of debt, and so on.

Taking the leap and building up an emergency savings fund can be a not-so-straightforward path yet saving for the unexpected, should an unpredictable expense or event occur, will be well worth your efforts.

Interested in discussing this topic further with a financial professional? With offices in 23 states, there is likely a North Star financial advisor near you. Contact a financial professional here.

1“2018 Financial Security Index.” Bankrate. Published January 2018.

2“Report on the Economic Well-Being of U.S. Households in 2017.” The Federal Reserve Board. Published May 22, 2018.

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