How To Build an Emergency Fund

When U.S. Senator Elizabeth Warren unveiled the 50/30/20 plan in her book, All Your Worth: The Ultimate Lifetime Money Plan, it seemed fairly fireproof. The rule states simply that your monthly income should be divided into three categories: 50 percent should be spent on your basic needs (housing and car payments, etc.), 30 percent on what you want, while the last 20 should go directly into savings. However, some experts have argued this seemingly straightforward idea doesn’t consider an individual’s lifestyle. Using that basic principle would make it impossible for some to navigate our current inflation crisis, so it’s certainly not helpful in emergencies. 

Here are some simple, common-sense ways to build an emergency fund. 

Stick to Small Goals

While some argue that you only need one or two months of salary set aside, the general rule is that you should have three to six months of your household expenses in an emergency fund. The size of your fund, of course, will vary depending on your lifestyle and career. While that can sound like an overwhelming number, breaking it down into smaller goals can make it seem more manageable. Start with the first $1,000 you need to save and go from there, increasing whenever you feel financially sound enough to do so. 

Open a Separate Emergency Savings Account

After setting your first goal, you’ll need a place to put the money you’re saving where it’s not tempting you. Part of saving money is keeping it out of sight, in a locked vault you know is meant to be untouched. This is a good time to shop around and find the account that offers the best interest rate. 

Automated Deposits Make It Easier

Much about saving money is psychological. If you never have any real physical connection with the money, you’ll be less tempted by it. Fortunately, a lot of employers offer direct deposit. You can then set up automatic transfers for part of your pay to go to a dedicated savings account. 

Keep Monthly Spending Regular

Now that the saving is automated, it’s your responsibility to keep an eye on your monthly spending habits. Ideally, you’ll want to resort to tried and true methods of saving, such as keeping all your receipts and planning your meals. It’s also critical not to open up any new credit cards, as eventually you’ll be spending your emergency funds paying the bill. Building a fund doesn’t mean you should cease all entertainment, but you should always keep it in mind.

Don’t Over Save

An emergency fund is not and should not be your general savings account. It’s a specific amount of money that you should be able to access quickly if the unthinkable happens. All you’re attempting to do is hit the dollar figure you initially set out to reach. Once you’ve achieved that goal, put the rest of your savings in the account where it will reap the most benefits of interest until retirement. 

Kenny Hedges | Contributing Writer

Fall 2023

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