How to build an emergency fund fast and protect yourself from life perils…
They say there are no guarantees in life, and that every one of us will face twists and turns in their lives. Some will be little inconveniences, while others will be life-changing moments. And 9 out of 10, they will need money to be resolved.
This is why an emergency fund is a practical thing to have. It will cover you in case of a job loss, accident, medical condition, car repair, home repair, or any other emergency you may face.
It will save you from entering into personal loans or credit card debt in times of emergency. Moreover, it will break the habit of debt, which most people already have in dealing with their finances.
This post is going to show you how to build an emergency fund fast and save your first $1000
What is an Emergency Fund?
An emergency fund is money saved up in a liquid account which helps cover financial emergencies when they arise. This includes emergencies like job losses, illness, accident, car repairs, home repairs, etc.
Its purpose is to improve financial security and create a safety net to meet emergency expenses. It also eliminates the need to incur credit card debt or drawing unsecured personal loans.
Why Should You Have An Emergency Fund?
Other than covering unexpected expenses, there are many reasons as to why building an emergency fund is important. Here are some situations in which you should have an emergency fund:
1. You Are Trying To Pay Off Your Debt
Did you know having an emergency fund will reduce your chances of incurring further debt? Picture this. If your AC blows off in mid-July, you will need to call the technician to come and repair it, and definitely, you will need to pay them.
If you do not have the money, you will most likely take out a personal loan or charge it on your credit card to cover the bill, sinking you into more debt.
Conversely, if you have an emergency fund, you would write a check and pay your technician.
Ultimately, having an emergency fund will help you stay the course when you are trying to pay off your debt.
2. You Are an Independent Contractor.
If you are an independent contractor or you do work that does not entitle you to unemployment benefits, you need to create an emergency fund saving plan immediately.
This is because the life of an independent contractor is usually one of uncertainty.
The emergency fund will thereby protect you when business is slow; there is a delay of payments, there
3. You Own Your Home.
If you own your own home, you need to have a sinking fund to be used to foot major expenses like remodeling.
On the flip side, you need an emergency fund to handle unexpected expenses like plumbing repairs and the like.
The emergency fund will prevent you from using your sinking fund, which you desperately need if major expenses were to arise from your home.
4. You Live Far Away From Home.
If you live far away from home and need to travel at the last minute for an emergency, it can be expensive.
A good emergency fund will cover you, and ensure you can get home in case of a medical emergency or funeral back home.
5. You Have Preexisting Medical Conditions.
Medical issues can have you max out your yearly deductible insurance cover quickly. Furthermore, you may need routine checkups that add up fast. Not forgetting, you may have to take sick leave without pay after maxing out your sick leave.
These health challenges can be overwhelming to anyone. However, having a well-padded emergency fund will see you through your health challenges.
It is therefore important to fund an emergency fund well if you have any medical conditions.
6. You Have a Savings Goal.
If you have goals like buying a home, starting a business, an emergency fund can help you achieve your goals.
This is because an emergency fund will prevent you from dipping into your savings whenever little expenses come up. And in the end, it will teach you the discipline you need to achieve your goals.
Want to save more, read this post on how to save money fast on a low income
7. You Have Just Started Budgeting.
If you desire to achieve financial freedom, you will need to have a budget. For the most part, when you start budgeting, some things will not be covered. This may include things like taxes, fees, or rates.
An emergency fund will come in handy when these expenses come up and you’re not prepared.
However, as you get used to having a budget, and developing the discipline of sticking to a budget, you should transition to not relying on your emergency funds to cover the difference.
It’s very advisable to stat a sinking for such expenses like taxes, fees or rates and not treat them like emergencies.
By and large, this will be tenable within 12 months of disciplined budgeting.
How Much Money Should You Have In An Emergency Fund?
One common question when starting an emergency fund is: “How much money should I have in my emergency fund?” The truth is there is no magic number.
How much you need will largely depend on how much you earn, your personal needs, if you have a mortgage or family, among many other factors.
However, a good starting point is $1,000. It may not seem much, but it will give you the traction you need to start saving. It’s a good starter fund amount.
This number has been lauded with many personal finance gurus. For example, Dave Ramsey’s emergency fund strongly recommends starting with $1,000 to help you start paying your debts.
However, if you want a more precise number, here are steps you can use to calculate how much emergency fund savings you need for three months, six months, nine months, or even a year
These calculations are going to use an average household income of $60,000 a year.
1) Calculate Net Income and Take Home
You first need to know your net income per year. This is how much you take home after all deductions are made.
The IRS released information on the 2020 standard deduction at 22% for a $60,000 pay scale for unmarried individuals. (*the percentage varies depending on your status which is head of household, a married couple filing jointly or separately, or qualifying widow(er)status).
For this article, we are going to use the single filing status or unmarried individuals as of December 31.
To calculate how much taxes you will pay you will multiply 22%*60,000
So your taxes will be $13,200.
And total take home will be: 60,000-13,200=$46,800
(*Your take home will also greatly vary depending on your state or city, your 401(k) savings, whether you have kids, tax deductions, and more. However, we are going to use $46,800 as our base.)
Then divide your take-home by 12. This calculation gives you how much you take home every month.
This will be $46,800/12 which is $3,900.
2) Determine How Many Months of an Emergency Fund You Want
As we have discussed, an emergency fund is there to cushion you. In case you lose your job, you are still able to meet your obligations.
For the above example, it should cover $3,900 a month, just like your salary.
So to calculate your emergency fund, you will multiply your monthly income with the number of months you want your emergency fund to cover.
>>For example, if you want a 3-month emergency fund, you will need to save $3,900*3 which is $11,700.
>>For 6 months, it will be $3,900*6 which is $23,400, and so and so forth all depending on how many months you want to be covered.
This number may be daunting; however, we are going to first start with the emergency fund challenge of saving $1000 fast.
How Much Do I Need To Save?
To save $1,000 fast, you can start with weekly savings. This 12 week saving plan is a good guide to start with:
Where to Put an Emergency Fund
Once you have hacked the discipline of saving for a rainy day, you will need to put your money somewhere.
You can decide to stick it under the mattress and in case of an emergency you just run in there and take what you need, and sort out your emergency.
However, there are better options where you can put your emergency fund.
1. High Yielding Savings Account.
This account is different from a traditional savings account. Firstly, it has a higher annual percentage yield (APY) on deposits which means your money earns a higher interest rate.
Secondly, it has fewer fees than a regular savings account. For example, you may not need to have a minimum balance or monthly maintenance fee.
To get the best deal of high yielding savings account, you should consider an online bank. They tend to have more favorable terms compared to traditional brick and mortar banks.
The only downside with an online bank is convenience. If you choose an online bank that does not have an ATM or bank branch near your area, you will need to transfer your funds to a traditional bank account then withdraw in a branch near you. It can be a hassle if you are in immediate need of the money.
2. Money Market Accounts.
These accounts are very similar to a high yielding savings account. They have high APY and low fees. Unlike a regular savings account, they come with a debit card and a check.
This may be very convenient if you need to pay for something using a debit card or write a check to cover an emergency.
However, most of them have a limit of 6 withdrawals per month. On top of that, they may have a minimum deposit to open. Some may need as much as $2,000 to open compared to only $1 with most high yielding saving accounts.
Even though it may be out of reach when you start saving, money market accounts are a good vehicle to save with for the long term.
3. Certificates of Deposits.
Unlike a high yielding account and money market account, you cannot dip into your savings six times in a month.
With CDs, you will have to commit to leaving your money there for a set amount of time. This can range from 30 days to 10 years and once the time lapses you can access your money which will have earned interest.
The main advantage with a CDs account is that it has a higher APY compared to a high yielding savings account and money markets account. Furthermore, they do not have monthly or maintenance fees.
However, the downside with CDs is that if you do an early withdrawal you will be fined. The fine can be a flat rate or a percentage of the interest accrued on the account.
Nevertheless, you can circumvent this by having a CDs ladder. This involves having multiple CDs accounts with different maturing dates.
For example, you can have 3 months CDs, 6 month CDs, 9 months CDs, and 18 month CDs. This staggers your withdrawal every 3 months, and you will not attract a penalty. And the accounts with a longer maturing period earn higher a higher APY.
4. Roth Individual Retirement Account (IRA)
If you should choose to take advantage of this option for your emergency funds, you should take it with a pinch of salt.
To begin with, a Roth IRA is a tax-advantaged vehicle meant for retirement savings. It earns a higher return compared to savings accounts, money market account, or even a CDs account, and upon maturity, withdrawal is tax-free.
The caveat is that if you use it for your emergency fund, you will be required to pay income tax on your withdrawal and be fined 10%.
Therefore, this method on how to save your emergency fund should not be your first line of defense.
5. Have a Multifaceted Approach.
If you cannot make a pick on which method you want to use, you can have a multifaceted approach. For this approach, you can have a high yielding savings account, money market account, certificate of deposits or a Roth IRA.
This way you will be able to spread your risk and have several umbrellas in case of a rainy day.
20 Ways To Build an Emergency Fund Fast.
Here are some hacks on how to build an emergency fund fast and save your first $1,000.
1. Budget For Your Emergency Fund.
If you do not have a budget, it is time to create one. It will guide you on how much you should be spending on grocery shopping, utilities, repairs, among other expenses.
It will also show you where you are losing money and unnecessary expenses and be able to allocate some money for savings.
Importantly, if you stick to your budget, you can save a considerable amount which you can use to fund your emergency fund.
Also, once your budget is lean, set aside a certain amount every month to fund your emergency fund.
This can be as little as $25. It may seem minuscule, but if you are consistent, at the end of the year you will have $420. You can also go for the 10% rule of saving and set aside 10% of your income for savings.
Eventually, when you get into the groove of saving, continually increase this amount.
2. Collect Extra Change.
Do you have some twos and ones lying around? If you do, how about collecting them and putting them in a mason jar..
If you do this daily with your spare change, you will find your jar filling up in no time.
Then you can cash the money into your emergency fund.
3. Make Money by Selling Some Stuff.
Most probably you have stuff lying around that you do not use. This may include things like shoes, clothes, bags, electronics, kitchenware, furniture, and many more things.
Instead of having them lying around, you can list them on Craigslist, eBay, Amazon, or Facebook market and sell them.
If you have a lot of stuff, you can organize a garage sale to sell them. Any money you make from the selling online or garage sale, you should deposit it in your emergency fund.
4. Carry Your Lunch.
According to Accounting Principals Workonomix Survey, 2012, 66% of Americans do not carry their lunch and prefer buying lunch at their work. Being so, their average spend is $37 a week, a little over $7 a day.
If you carry your lunch, you will have $37 every week to go towards your emergency fund saving plan.
5. Cut Back On Your Coffee.
That $5 caffeine cup from Starbucks is derailing you from having an emergency fund. Your weekly spend is about $25 which you can channel in building an emergency fund.
6. Use Cashback Apps.
One of the best ways to save on grocery shopping is to use cashback apps.
7. Cut Your Subscriptions.
Have a look at your recurrent subscriptions, things like phone bills, cable, internet, insurance and the like.
They will help you cancel subscriptions you no longer use and manage your subscriptions efficiently. The money you save from them you can fund your emergency fund.
8. Cancel Your Gym Membership.
Yes, you, cancel your gym membership. But, I use it. No, you don’t. Did you know 67% of people do not use their gym membership?
Being that the average monthly gym membership is $58 per month, this money can be put to your emergency fund.
9. Hunt for A Good Cellphone Subscription.
An average American spends about $100 on their cellphone plan. However, they pay more than they use.
If you are one of them, you can shop for a cheap cellphone plan which gives you unlimited talk and text.
For example, if you score a $30 cellphone plan you will be able to save $70 on your subscription which can boost your emergency fund saving.
10. Bundle All Your Insurance with One Company
Having your insurance products spread across different insurance companies is expensive. By bundling them under one company, you can save as much as $200 per month on your insurance bill.
To do this, call some insurance companies and ask what they offer for a bundle package. Compare all of them and then choose one with a good offer. Imagine putting $200 in your emergency fund.
11. Switch to Home-Cooked Meals
If you eat out frequently, it may be time to switch to home-cooked meals. It will most likely save you about $200-$250.
This is a considerable amount that can get you to $1,000 goal for your emergency fund fast.
12. Use Cash Only
Do not use any credit or debit card to make payments until you reach your $1,000 goal for your emergency fund.
Paying things in cash gives you a whole different mindset which makes you think twice about your purchases.
If you are consistent in using cash you will save about $200 in a month which you can fund your emergency fund.
13. Take Up A Side Hustle
No one likes picking up extra hours on top of an already tiresome job 9-5. It always results in spending less time with your family, little sleep, and an overall increase in stress and burn out.
Let’s face it, no one likes it.
However, this is the quickest way on how to build an emergency fund fast and save your first $1000.
So, how do you get started? First and foremost, use what you have. If your job allows you to clock overtime, then take advantage of it and earn some money on the side.
If you have a skill set that you can sell and make money, shot your shot. With skills like graphic design, photography, writing, data entry, typing, you get started in the gig economy with sites like Fiverr.
This emergency fund saving plan will get you to $1,000 very fast. The trick while using this method for your emergency fund saving is to avoid lifestyle inflation. Any money earned should be deposited in your emergency fund.
Get some awesome ideas here:
14. Have A 30-Day “No Spend Month” Challenge
For 30 days, spend your money only on essential items, those are food, shelter, and clothing. Thereafter, the money you save from not spending on non-essential items put it in your emergency fund.
If you have discipline with the 30 days no spend, you can save up to $300.
15. Take Up A 30-Day “Drink Water Only” Challenge
For one month, stay away from sodas, alcohol, and energy drinks. Drink only water to stay hydrated.
Not only will you be healthier, but you will save a lot of money. The money you save from unhealthy drinks deposit it in your emergency fund.
16. Set Up an Automatic Savings Transfer
One way to prevent unwanted spending is not having money with you. To execute this, you can set up an automated savings transfer system.
For example, you can set up a $200 savings transfer from your salary account, which will be directed to your emergency fund every month.
17. Bundle Your Utilities under One Company
Bundle up your electricity and gas together under one company. Do the same with your phone/internet/cable utilities.
Not only will get better rates, but you will save a lot of money that you can direct to your emergency fund.
18. Be Smart about Your Taxes
You cannot dodge the taxman, but you can be smart on how you handle him.
For starters, contribute to a 401k and HSA. The deductions made for these accounts are pre-tax, consequently, when your adjusted gross income is taxed, your tax bill is reduced significantly.
To push it further, if you can max out on your contributions on these accounts go ahead. Your taxes will be even much lower.
Also, take advantage of your Retirement Savings Contributions Credit. If you use it, you can easily have a tax bill which is $0.
The money you save from your taxes can then fund your emergency fund.
19. Switch To Bi-Weekly Mortgage Payments
If you get paid every two weeks, why not pay your mortgage bi-weekly? For the most part, many banks allow for this arrangement. All you have to do is talk to them.
With this arrangement, you will end up saving money on interest and finish paying off your mortgage early.
The money you save will go a long way to your emergency fund saving plan.
20. Be Smart with Your Car
If your car has high monthly payments that you are struggling to pay, sell it off.
The money you make, use it to get a cheaper car, this will drastically reduce your monthly payments.
The money you end up saving use it to fund your emergency fund.
An emergency fund is what will help you weather the storms of life. It is a responsible thing to start one and continue growing it.
To get started on how to build an emergency fund fast, apply the above tips, and in no time you will have saved your first $1000.
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It is very important to have an emergency fund as this money will be able to cover your financial emergencies when they arise. For example, emergencies such as job loss, illness, accident, car repairs, home repairs, etc.