One of the most commonly doled out pieces of financial advice may well be, “Start an emergency fund.” You’ve undoubtedly been on the receiving end of this wisdom before, but even though it’s a valid tip, it can be hard to implement.
This is especially true when no one actually tells you how exactly you go about building up that financial safety net. At SoFi, we’re committed to helping our members plan for their future—and part of maintaining secure financial footing is working to ensure that you can handle the unexpected expenses life brings.
Imagine if tomorrow your mechanic told you that you needed to replace your brake pads—to the tune of $500. Would you be able to cover that expense without reaching for a credit card?
Would you be able to pay the bill without reorganizing your monthly spending to account for the extra cost? If you’re doing mental gymnastics to figure out how you’d pay for a $500 financial emergency, you’re not alone.
In fact, only 40% of Americans can pay for an unexpected $1,000 emergency expense (which means their emergency fund is effectively their credit cards). And that’s not the only reason an emergency fund is crucial—it can also keep you stay afloat if you suddenly lose your job or need to take unpaid time off work.
It should be used to cover the out-of-ordinary expenses, keeping you out of debt and your phone number out of the hands of creditors. With that in mind, here are some tips on how to start building your emergency fund today.
Aiming to Save Three to Six Months’ Worth of Expenses
In the grand scheme of life, $500 is a relatively small amount of money. A car accident, injury, or job loss may well bring you much higher out-of-pocket expenses. And unfortunately, surprise expenses have a tendency to pile up. This means that you shouldn’t just stick $500 in your savings account and call it a day.
To help calculate how much you need to save, look at the deductibles your auto and health insurance have you pay in the event of an accident, emergency room visit, or ambulance ride. That cost is the very minimum amount of money you would have to shell out for a minor misfortune.
In general, three to six months’ worth of expenses is a good base for determining how much you would need if you lost your job, were temporarily disabled, or had to take time off to care for a sick family member.
While you could add up all your monthly expenses, another way to make this estimate is to start with your take-home pay, subtract any money you’re already saving, and subtract money you don’t need to spend.
What’s left are your monthly expenses. Another benefit of this method is that it gives you the opportunity to see what spending you can live without, which you can cut out of your budget now and start weaving into your safety net.
Starting Small and Stockpiling When You’re Able
Most young professionals don’t happen to have three to six months’ worth of income just sitting in their checking accounts, waiting to be moved to an emergency fund. Instead, you’ll need to figure out exactly how to fund that goal. You could try starting your emergency fund with any minor windfall—a tax refund, bonus, or even a birthday check from Grandma.
After you’ve got a base, automate your cash management account to transfer a small sum of money to your emergency fund each pay period. It’s okay to take your time building up your fund, but if you don’t take the first step and start, you’ll never get ahead.
Remember, you can use your money to buy something that will make you feel rich in the moment, or you can save it and increase your wealth over time.
Where Should You Keep This Account?
The whole point of an emergency fund is that it is easily accessible money, which means it needs to be liquid. Interest rates are often fairly low for savings accounts, but if you shop around, you’ll find some out there that pay over 1%.
With this type of account you are able to keep your money liquid while growing it at the same time. As you look, try to make sure the account is FDIC insured as well.
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Adding to Your Emergency Fund
As mentioned above, it is okay to start small with your emergency fund. Not everyone is able to fully fund their account right away. If you want to help boost the amount in your emergency savings, there are a few things you can try.
• Start a side hustle. If you have some extra time on your hands you can try launching a side hustle. Do you like art? Try selling your pieces on Etsy. Have a passion for landscaping? Charge for your gardening skills on the weekends. There is no limit to what you can try, plus you can make some extra cash to put towards your emergency fund.
• Cut your budget. This one might be a bit harder to do, but take a look at your budget and see where you can make cuts. Do you need to eat out to dinner 3 nights a week, or can you cut it down to 1? Do you need that huge cable package you pay for? See where you can eliminate some costs in your budget and put that extra money towards your emergency fund.
• Automate your savings. A great way to continue saving money for your emergency fund is by automating your savings. Set up regular payments from your checking account into your savings account so that money automatically gets transferred on a weekly or monthly basis.
If You Need Motivation, Try This Experiment
One of the biggest challenges some people face in saving for an emergency fund is motivation. If you find yourself tempted to spend your yearly bonus on a new car or truck’s worth of fancy seltzer water, try this instead: For one week, live on the money you’d get if you filed for unemployment in your state.
This is no easy task, and it will give you an idea of exactly what you’re saving up to avoid. If you make it a week, consider if that’s really what you want to go through if you lose your job with no backup in place. Once you commit to focusing on your emergency fund, use the money you didn’t spend that week to start your account.
While saving an emergency fund is one of many competing financial priorities, having a cushion to catch you when you fall can prevent a minor calamity from spiraling into lasting debt. The toughest part may be getting started and staying motivated. Just remember, you walk 10 miles by walking 10 feet at a time.
Saving With SoFi Money
Looking for a place to house and save for your emergency fund? A SoFi Money® cash management account could be the perfect account for you. With SoFi Money you can spend, save, and earn all in one account. You’ll earn 0.20% APY on all your cash and there are no account fees. We work hard to give you high interest and charge zero account fees. With that in mind, our interest rate and fee structure is subject to change at any time.
Plus, with the vaults feature you can easily create financial vaults within your SoFi Money account for different purposes (like an emergency fund). You can name each of the vaults and easily keep track of progress.
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