Uncertainty will always exist — but if you are prepared, you will not be fearful. You got this. Medical emergencies and other financial priorities can loom large on your horizon, and lowering your financial defense isn’t the wisest of choices. Having an emergency fund serves more than a financial cushion. Instead, this cushion is a lifeline to uphold financial resilience when the unexpected happens.
Do you know that one in five Americans doesn’t have an emergency fund? In 2023, nearly 30% of the population has some emergency fund, but it falls short, covering just 3 months of emergency expenses.
Now, you might wonder how to build an emergency fund when you don’t have any additional resources. This guide has 40 smart strategies that should help you make an emergency fund and strengthen it further. From basics to advanced investment strategies, we’ve got you covered!
What Is an Emergency Fund and Why Do You Need It?
An emergency fund is a kind of savings you must accumulate to cover unforeseen expenses or financial emergencies. It’s a highly liquid pool of money you set aside from your regular investments or savings.
Think of a job loss or a medical emergency that can throw you off your financial goals. Rather than compromising your retirement savings or funds for kids’ education, your emergency fund can come to your rescue. In simple words, it serves as a source of financial security in times of crisis.
Financial advisors recommend building an emergency fund before you start accumulating wealth for the long term. Considering the uncertainties in life, it’s wise to save enough to sustain your family for at least six months. Whether or not you earn during this phase, having an emergency fund will help you weather the storm and ensure mental peace.
“Whoa, six months–I can never do that!” Well, you can sit and cry about not having this fund right now — or just start saving it. And what if–oh no! “It” happens? You don’t have six months? Well, maybe you have gotten to two or three months. I can promise you that building this fund a little at a time will relieve more stress than you can ever imagine.
Proven Strategies to Build Your Emergency Fund
Here are some ways you can build a steady emergency fund over time.
1. Start saving from your income
The easiest way to start saving for an emergency fund is to set aside a part of your income for it. This disciplined approach ensures you can save consistently to build an emergency fund without compromising your well-being.
2. Automate your savings
While letting your earnings slip by your fingers is easy, automating your savings can help you build your fund. Set up an automatic transfer from your salary account to your emergency fund account. This way, a specific portion of your income will be automatically transferred before you can withdraw the rest.
3. Trim the budget fat
How about identifying non-essential expenses and curtailing them? For instance, eat out twice a week rather than thrice. Thus, you can redirect the money into your emergency fund. Try to save on other avenues like entertainment and shopping.
4. Reduce your debt
Are you currently shelling out high interest on credit cards or other debts? This is eating into your finances. Pay off these debts first or consolidate your debt at low interest. Channel the money you save on interest into your emergency fund. Experts say to consolidate — I don’t like this method.
5. Save unexpected money
Why not use financial windfalls like bonuses, tax refunds, or unexpected cash gifts? Rather than squandering the amount, put them into your emergency fund.
6. Start a side hustle
Start a side hustle or engage in a part-time job to boost your savings. Make sure to put the additional income into your emergency fund to boost your savings.
7. Turn clutter into cash
Have you considered decluttering your home and selling items you no longer need? Invest the money earned from these sales into your emergency fund. This will keep your savings growing for the rainy day.
8. Review your monthly budget
How often do you evaluate your monthly budget for potential savings? Try to identify areas where you can curtail costs. For instance, you may settle for a cheaper broadband connection or get discounts on your credit cards while purchasing groceries.
9. Prevent accidental spending
Did you open a separate savings account exclusively for your emergency fund? Unless you separate it from your regular account, you can’t rule out chances of accidental spending. Consider opening a high-yield savings account to grow your funds faster.
10. Downsize your assets
At times, you may want to accelerate the growth of your emergency fund. Consider downsizing your house or car to save money. Put this amount into your emergency fund to boost your financial cushion.
11. Cut down on impulse purchases
Do you habitually indulge in making impulse purchases? Well, that bad habit keeps you from growing your emergency fund. Try not to swipe your credit card every time you wish you had something!
12. Consider liquid assets
When building an emergency fund, incorporate liquid assets into your portfolio. This implies you will have the cash easily available during financial emergencies. Even selling off stocks during a medical emergency can take considerable time!
13. Adjust your emergency fund
Your emergency fund isn’t an invest-and-forget asset. Don’t let them sit idle. Instead, consider reviewing the funds and adjusting them to evolving financial situations. For instance, increase your monthly investment following promotion or factor in changes in your lifestyle to make necessary modifications.
14. Celebrate milestones
Well, it’s time to incentivize yourself when you reach a milestone! Celebrate crucial milestones by putting more money in your emergency fund to keep it growing. This will reinforce the habit of saving and prioritizing your financial safety.
15. Invest a portion of your emergency fund
Consider investing a portion of your emergency fund in low-risk assets. Go for a money-market fund or short-term bonds that yield potentially higher returns while maintaining the accessibility or liquidity of the fund.
16. Park your funds in interest-bearing accounts
Have you considered interest-bearing checking or savings accounts? Explore these accounts at different banks where you can earn a modest return on your savings. This will gradually fuel the growth of your emergency fund.
17. Consider peer-to-peer lending
If you have excess funds besides the emergency fund, consider signing up on peer-to-peer lending platforms. You can earn interest by lending money to small businesses or individuals. Although this strategy involves considerable risk, you can put the earned interest into your emergency fund without touching the accumulated savings.
18. Capitalize on your talents
Think about your marketable skills beyond your profession. Venturing into freelancing or consulting can fetch you additional income to funnel into your emergency fund. Consider writing blogs, graphic designing, photography, or developing websites for side income.
19. Bank on your employer’s contributions
Why not take advantage of your employer contribution programs? Channel your earnings from 401(k) or an Employee Stock Purchase Plan (ESPP) into your emergency fund.
20. Keep your emergency funds intact
While growing your emergency fund is tough, it’s easy to use it up! Have you invested in adequate insurance policies to cover your health and home? With proper coverage, you can keep your emergency fund intact.
21. Securing your emergency funds legally
Do you have any legal measures in place to secure your emergency fund? Set up a power of attorney or draft a will to protect your emergency savings in case of unexpected events or emergencies. You may also recommend specific instances in which this fund should be used.
22. Take guard against inflation
Investing a part of your emergency fund in assets that outpace inflation is wise. This ensures that inflation won’t affect your purchasing power when you use your emergency funds. For instance, invest a part of the funds in Treasury Inflation-Protected Securities (TIPS).
23. Quick access matters
Make sure that a part of your emergency fund remains highly liquid. This ensures immediate access to the fund without delay to address any financial emergency.
24. Recover your funds promptly
Once you use your emergency fund, make it a priority to replenish it. Recovering the funds quickly ensures that you remain prepared for unexpected expenses in the future. Work on building your emergency fund consistently to maintain your financial integrity.
25. Set criteria for using the fund
Do you have any well-defined idea of when to use your emergency fund? It’s imperative to establish specific criteria to prevent frivolous spending. This way, you can reserve your funds for genuine financial emergencies. Remember, dinners and parties are not emergencies.
26. Consider tax implications
Well, have you considered tax implications for your emergency fund? While you accumulate wealth, the interest earned may be taxable. Besides, certain investment accounts offer tax advantages. It’s wise to remain informed about these benefits and strategize your investments accordingly.
27. Grow your fund size
As your financial situation improves, increase the size of your emergency fund. This ensures added protection to your financial well-being. This is a proactive stance that enhances your financial resilience.
28. Diversify your income
Consider diversifying your income sources to maximize the inputs you can put towards building your emergency fund. Take on a side hustle or a business if you are doing a job. With higher fund inflow, you can stabilize your emergency fund. Ensure you have an optimum allocation in stocks, mutual funds, debt assets, real estate, etc.
29. Keep an eye on interest rates
How often do you monitor interest rates on your savings and investment accounts? Take advantage of earning more from your emergency fund when the rates rise. With this strategy, you can keep your funds growing.
30. Plan for large-scale emergencies
While you might be accumulating your emergency funds primarily for addressing personal emergencies, consider scenarios like economic downturns or natural disasters. It’s wise to remain prepared for large-scale emergencies and arrange funds for such situations.
31. Create family emergency funds
Although you’ll create an emergency fund for your entire family, encourage your family members to establish their own funds. When you help your loved ones to develop their respective funds ensures holistic protection for your entire family during the rainy days.
32. Maximize Gains
Did you explore tax-efficient investment accounts like Roth IRAs or HSAs? These contributions grow tax-deferred or tax-free, which will help you pacify the accumulation of your emergency funds. These accounts offer benefits beyond traditional accounts while ensuring accessibility.
33. Asset diversification
Consider diversifying your emergency fund and investing in precious metals like gold or silver, which serve as a hedge against economic instability. This will secure your emergency fund from inflation.
34. Commit for long-term
Building an emergency fund calls for a long-term commitment. Focus on your financial goals and continue saving, considering your emergency funds as part of your financial strategy.
35. Accumulate targeted savings
Create separate funds for specific goals, such as home repairs or hospitalization. Being particular and specific about your savings ensures you remain financially prepared for future expenses.
36. Consider emergency fund penalties
Certain investment accounts come with penalties for premature withdrawals, such as individual IRAs, certificates of deposit, and 401(k). It’s wise not to invest your emergency fund in any such account if you have a short-term view.
37. Grow your mental resilience
Building an emergency fund is not just about money. It involves emotional preparedness. So, strengthen yourself emotionally and grow resilience to cope with financial emergencies effectively.
38. Use financial tracking tools
Using mobile apps or digital tools to track your emergency funds is wise. These apps help you transparently monitor the growth of your emergency fund and help you stay on target. Just don’t get every app on the planet! There are many free apps to track your money.
39. Maintain transparency
While you grow your emergency fund to address your family’s specific needs, it’s important to maintain transparency with your family members. They should be aware of the existence and purpose of the fund. Thus, you can keep everyone on the same page regarding financial preparedness.
40. Take contingency measures
Have a contingency plan in place in case your emergency fund falls short in a significant crisis. For instance, check your eligibility for a line of credit or a short-term loan as a last resort to avoid significant financial setbacks.
Endnote
Building a robust emergency fund is more than a financial strategy. It’s a commitment to your financial resilience and mental security. This guide has discussed as many as 40 measures to build and grow your emergency fund. With the right strategy, you can create this fund even if you don’t have any savings right now. Brace up for the unexpected challenges that life puts forward by growing your emergency fund.
FAQs
How long will it take to build a substantial fund?
Building a substantial emergency fund depends on your income, expenses, and dedication. You also need to review your funds from time to time with changes in your lifestyle and set goals. It’s a continuous process where you need to start consistently and follow up.
Should I use a credit card as an emergency fund?
No, it’s risky to depend on your credit card solely as your emergency fund. After all, you need to repay the amount to the respective provider. Moreover, taking a credit card loan would require you to shell out higher interest rates than traditional loans.
How can I build an emergency fund if I have an irregular income?
If you have an irregular income, most of your fund inflow is spent on household expenses or other priorities. However, saving a certain percentage of your income is wise to mitigate financial stress during a crisis. Cut down on unnecessary expenses and luxuries and start a savings account to save small sums.
What’s the difference between an emergency fund and an investment fund?
The purpose of an investment fund is to grow your wealth, but it might not be readily accessible. On the other hand, an emergency fund has to be liquid and involve low risk. You should be able to access this fund immediately in case of unexpected events.
Featured Image Credit: Photo by cottonbro studio; Pexels
