Emergencies happen. Here’s how to save for unexpected expenses

February 3rd, 2020

Article Image

As much as we’d like to avoid thinking about them, emergencies do happen. So it’s important to have an emergency savings account for those unexpected life events. Here’s how to get started:

What is an emergency fund?

An emergency fund is money you’ve set aside for—well, emergencies. Those big expenses that no one plans for or expects but inevitably happen. Car accidents or repairs, a hospital visit, a flooded basement.

Starting an emergency fund doesn’t have to be scary. Aim to save $1,000 and work upward from there; $1,000 will cover many small emergencies, such as a broken dishwasher or trip to the ER.

Why save for emergencies?

Your emergency fund is a safety net. You don’t always know what life will bring your way—or when. With an emergency fund, you can respond to life’s surprises and still pay the bills each month. You don’t want to take on debt because you couldn’t cover the costs of an emergency. And the last thing you need when going through a stressful situation is the additional headache of trying to figure out how you’ll pay for it.

What is an emergency?

Some expenses feel urgent, but they aren’t necessarily emergencies. Here are some examples of emergencies and expenses that aren’t emergencies:

Emergency

Not an emergency

Your car needs its alternator replaced.

Your television breaks and you need to replace it.

You need to go to the emergency room.

You have to buy a last-minute birthday gift.

Your furnace breaks in very cold weather.

Your old cell phone works, but a new phone you want is on sale.

How much should I save?

Most financial experts recommend between three and six months of living expenses in your emergency fund. That sounds like a lot of money, so remember that saving is a process. Set smaller goals and work your way up.

  • One month of savings: If you’re young or just starting your career, set a goal to save one month of living expenses.
  • Three months of savings: As you grow your savings, look to increase your savings goal. Try to save three months of living expenses, and then six.
  • Twelve months of savings: If your financial situation is unstable or could be in the coming year, aim to have 12 months of living expenses in savings. You’ll want more in savings if your income varies a lot, your household has one income earner, there’s a chance you’ll lose or quit your job this year, or you plan to take unpaid leave.

Try our financial calculators to see how much and how long it will take to meet your goal.

How do I get started?

It’s important to note that saving three to six months in living expenses takes time—and that can be intimidating. Take it step by step and you’ll be on your way to saving in no time.

  • Make a budget to see where you can start saving money. Keep in mind you may have to cut back on expenses.
  • Set a monthly savings goal and check in regularly. Remember, every little bit helps.
  • Set up an automatic transfer to move the money into a savings account.
  • Gradually increase the amount, if you can.
  • If you get extra money—such as a tax return or bonus—put it directly into savings.
  • Keep the change. Save your coins and $1 and $5 bills from breaking a $20 in a jar. When the jar fills up, deposit the money into your emergency fund.

Having an emergency fund can help keep you out of debt and ensure you’re prepared for life’s unpleasant surprises. Remember, every little bit helps—save what you can and keep working toward your goal.