How to create an emergency fund

Emergency Fund Needs and How to Get Started

Despite the importance, in a recent survey, 39 percent of American adults indicated that they had no money in their savings account.¹ Unfortunately, too many people make the mistake of not establishing an emergency fund knowing that they have a credit card or two to fall back on when they don't have enough cash. However, if you're not paying the balance in full at the end of the month, then you're compounding the problem by getting tangled in an interest cycle that could cost you even more.

We all know life can be unpredictable. Inevitably, things such as a broken refrigerator, unexpected vehicle repair, or out-of-pocket medical expenses can leave you with few financial options when you have an immediate need for cash. An emergency fund can provide you with readily available money at a time when you need it the most. The following are three easy steps to help get your emergency fund started - even if you don't think your budget can swing it:

Step one:

Determine how much you can save. Begin by crunching the numbers to see how much you can set aside each week, month, or even per paycheck. If you discover that you can only save a few bucks out of your monthly budget, that's okay, because you need to start somewhere. For example, saving just $20 a week adds up to $80 a month or $960 a year.

Step two:

Locate the money that's hidden in your budget. In other words, determine what you can cut back on in order to save an extra $10 or $20 a week to build your emergency fund. Most of us can quickly identify where we fritter away at least a few bucks each week, such as buying our morning coffee (instead of brewing it at home) or eating out every day at lunchtime (instead of bringing it). And if you don't think you'll save much in these two areas, try using DollarTimes.com's coffee calculator or Bankrates.com's lunch calculator to see how much you're actually spending.

Step three:

Keep your emergency money out of reach. Out of sight is best when it comes to building your emergency fund. Don't make the mistake of keeping a cushion or reserve of cash in your checking account or in the form of cash. Why? Because it's too easy to spend! Unfortunately, when willpower gives in, that money can vanish quickly. Instead, open a separate savings account and forgo linking it with a debit card. Yes, that will mean that you may need to go into a branch to withdraw your money, but it will make it that much harder to access when the impulse to spend hits you.

How much should you save for an emergency?

How much you should have reserved in an emergency fund is a personal preference. However, according to many financial professionals recommend having somewhere between three and six months' worth of living expenses stored away in an emergency fund. Unfortunately, a recent survey found that only 19 percent of adults have a savings of $5,000 or more to cover their living expenses to cover an unexpected incident.² The bottom line is that saving something is better than saving nothing at all. Don't let the fact that you're already hard-pressed for cash prevent you from establishing an emergency fund for a rainy day. Going without an emergency fund only perpetuates more debt, creating a financial hole that can be difficult to crawl out of.