How to start an emergency fund

We’ve all been there - the washing machine breaks down, there is an issue with the car, or something is wrong with the furnace or air conditioning unit. So we pay for this expense with a credit card. There is nothing wrong with that, but if we don’t have the funds to pay off the bill, we are just pushing ourselves further into debt.

Creating an emergency fund (a financial safety net) is a way to remove the stress of sudden expenses, and provides a way to be prepared to handle unexpected expenses.

Start an emergency fund in 5 easy steps:

1-      figure out how much you would like to save

Ask  yourself how much you would like to have saved up to feel secure. Some believe that  an emergency fund  should be able to cover 3 to 6 months of expenses, this includes rent/mortgage, utilities (electricity, gas, Internet, TV), cell phone, car payment, transportation, food, monthly medications, etc..

When you add up all of these items and multiply by 3 or by 6, the number will be high But start slow to build this account, by starting slow and small, i.e.: $5 or $10 a week or every payday, you will be on your way to building this account.

2-      Calculate your monthly expenses

Make a list of all of your expenses – housing costs, food, utilities (hydro, gas, heating) debt repayments, transportation costs (car payment, gas) , insurance, child care, cell phone, etc. Check out how you can get a snapshot of your expenses HERE.  

This monthly expense sheet will allow you to have an accurate summary of expected income and expenses for one month. Now, I have heard many people say that budgets are boring, but this monthly budget allows you to see how you spend and/or save your money each month. What’s more, this will help you keep track of your spending patterns.

Check out the budget tool on the right to see how much you can save each month to put into your emergency fund.

3-      Determine how much you can  afford to save

Once you go through the tool on the right, you can take the steps to build up your emergency fund. Even if it takes time to get it to where you want it to be, that’s really OK. The most important thing is that you get started.

Start with $5 or $10 every payday, this way you can gradually make steps in building up you rainy day account.

4-      Open a separate emergency saving account

Now that you have determined how much you would like to save, a great way to secure this is in a separate savings/ money market account. This way, you have the liquidity that you need while getting not a lot of interest, BUT the funds are quickly available to you in case of an emergency.  

5-      Make saving to your emergency fund automatic

So now that you have used the budget calculator, you now know how much you would like to save each month. Make the saving of this money easy by scheduling automatic deposit from your day-to-day account to your emergency fund. This way you do not have to do a thing, just sit back and watch as the balance grows every month.

So there you have it! I hope that you find the tool above helpful.