How to Save Up Money for an Emergency Fund

When my friend bought his first house, he had no idea flooding didn’t fall under his home owners insurance. A hurricane came through and damaged his floor, windows and wiring. Without an emergency fund saved up to cover the damage, he had to fix up the wiring himself and lived with boarded up windows and warped floors for months before he managed to afford the repairs.  

Whether you’re facing an unexpected hospital bill, a layoff or a really expensive speeding ticket, when you’re in fight or flight mode, the last thing you want to do is make a financial decision that could impact you for years.

Luckily, we can prepare for the twists and turns life throws our way. Emergency funds, savings accounts that you only touch when you need to pay for large, unexpected expenses, can keep a bad situation from becoming an impossible one.

A well-maintained emergency fund ensures that you have enough money to cover anywhere from 3 months to 1 year of essential expenses. Of course, you won’t get there overnight. You may want to start by saving $1,000. This may not cover everything, but it can  buy you enough time to do some research, call-in reinforcements and figure out the best path forward.

We all know that we should expect the unexpected, but we rarely believe something unexpected will happen to us. These days, 56% of Americans say they can’t cover a $1,000 emergency, let alone something more catastrophic. An emergency fund helps you cover any unexpected expenses or keeps you afloat when you unexpectedly lose a revenue stream.

While most people think about scary medical bills and unexpected repairs when someone says “emergency,” many things constitute “financial emergencies.” A financial emergency can be anything of these (and many more):

• Losing a job or clients 
• Encountering medical emergencies
• Needing home or car maintenance 
• Encountering unexpected travel costs
• Being responsible for funeral costs

Being prepared for an emergency not only gives you less to handle in a difficult moment, but also may prevent you from going into debt. You might end up paying more for the expense and you could negatively impact your credit score as well as your ability to borrow money in the future.

While anyone can experience an emergency, emergency funds are particularly important if you own your own business or you work in the gig economy. Unexpected emergencies do not just cost money, they cost time. If you’re a gig worker or business owner, you may not have sick days or paid time off. Every hour you’re not working is an hour where you’re not earning. If an emergency keeps you off the job, you’re paying a double penalty.

Similarly, if you’re responsible for running your own business, a few unexpected days off could mean angry clients and a major hit to your revenue stream. Avoiding these situations takes just a little planning and a little saving.

Now that you know why emergency funds matter, your next question might be, how much money do I need in it? Most experts recommend saving 3 to 6 months of regular expenses if you work a standard 9 to 5 job and 5 to 12 months for business owners. This number looks different for everyone, so you’ll need to spend some time with your budget. 

In addition to calculating your monthly expenses, you may need to think about your level of risk. To assess personal risk, you might consider any these things:

• Your pre-existing medical conditions or those of family members 
• Whether or not you own a car 
• The stability of the economy 
• Riskiness of your lifestyle 

If you have a business, you may also need to consider the risks and adaptability of your endeavor.  

Once you know how much you want to save, you need to know where you’re going to put it. A good emergency fund needs to be accessible, but not so accessible that you’re tempted to use it for non-emergencies, so checking accounts are probably out.

A good emergency fund also needs to be reliable which means stocks or real estate are probably not great ideas. Of course, you still want it to be gaining some value so keeping cash under a mattress isn’t ideal (although not unpopular). A high yield savings account may be your best bet.

Right now, most high yield savings accounts offer between 4% and 5% APY. As the Federal Reserve raises interest rates, saving becomes even more appealing. If you’re a business owner, you may even want to consider opening two accounts, one for your personal life and one for your business.

Knowing how much to save and knowing how to save are two different things. Luckily, if you know how much to save for your fund, you should know how much you’re spending. When you know your spending, you can begin to prioritize savings by turning your habits into a budget.

For your first-time budgeting, a 50/30/20 budget could be a good place to start. The 50/30/20 means that you use 50% of your income for daily expenses, 30% for “fun” and 20% for savings….