Secure Your Financial Future: A Simple 3-Step Process for Building a Solid Emergency Savings Plan

Everyone needs an emergency fund. It doesn’t matter how much they earn. Life has ups and downs for everyone; when there are downs, you may need money to get through it. Everyone experiences emergencies but it is how you handle them that matters.

Having an emergency fund protects you during difficult times. It allows you to focus on fixing the problem without dealing with financial issues too. Knowing you have money to cover your bills and basic living expenses makes life easier, even when things get tough.

But how much money should you save and how do you save it? Keep reading to learn more.

How Much Should an Emergency Fund Have?

Everyone should save three to six months of expenses in their emergency fund. But that’s the ultimate goal. So don’t worry about saving that immediately, but work toward it.

You can start with small goals and work your way up. For example, if you have a dual-income family and both incomes are stable, a 3-month emergency fund may be enough. However, if you are a single-income family, are self-employed, or mostly earn a commission, you should consider a six-month emergency fund.

Step 1: Establish a clear financial savings goal

How do you work up to your emergency savings goal?

No matter how large your goal is, consider starting with a $1,000 target. Having a small goal is much easier for most people to achieve and allows you to satisfy most minor emergencies.

For example, if you have a car issue or your water heater breaks, you would have the funds to cover it. Saving $1,000 should only take a few months, especially if you focus on developing a monthly budget with a monthly savings goal. 

After reaching your $1,000 goal, try to save one month of your expenses. Your total should include all bills plus your living expenses. Saving one month of expenses protects you during short-term issues, such as an illness or injury making you incapable of working. You will have the security from having a month of expenses saved.

Eventually, you should work up to your three to six-month goal. Your financial well-being depends on your household being able to absorb some financial shock when life happens. No one should feel invincible, as emergencies happen to everyone.

Step 2: Create monthly Spending and Savings plan, aka budget

Once the financial goal is established, the next step is to start saving.  You need a plan for your money each month.  Take your savings goal and break it down into smaller steps, like over 3 months.  These smaller steps make it more manageable.

Next, write down your total household income and expenses. If you are not sure about your total income or what you spend monthly, check your most recent bank and credit card statements.  Using your statements, you can determine your monthly expenses.  Categorize your expenses into one of the 12 categories below.  This will help simplify your budget.

Recommended Budget Categories

By living below your means, your budget should include room for savings.  Set a 30-day savings goal and include it in the savings category of your budget.  As you progress through the month, make spending adjustments in all the other expense categories to the ensure savings goal is achieved.  Step-by-step or month-by-month you will build your emergency savings.  Moreover, you will be developing great financial habits.

As you create your budget, you might discover expenses you cannot afford or have lower value to you. Consider eliminating those expenses now.  Every expense you eliminate allows you more room for savings, and the more you save, the easier it is to handle life’s emergencies.

Step 3:  Open a Separate Savings Account

It is important to note that an emergency fund should be kept separate from other savings and investing accounts.  The purpose of an emergency fund is to provide immediate financial relief in the event of an emergency, and it should be easily accessible when needed.  Therefore, it is generally recommended to keep your emergency fund in a low-risk, highly liquid account, such as a savings account or money market account.   The use of a separate account provides three benefits:

1. Clear visibility of progress towards the emergency savings goal

• Make it easy to track and keep in front of you!

2. It allows you to save money easily without the risk of spending it

• When you have money in a separate account, you are less likely to spend it. For example, let’s say you go shopping and see something you want but did not plan ahead to buy. If your emergency fund money is in your checking account, you are more likely to make the purchase, depleting your savings.  If you save the money separately, spending is more complicated, and you are more likely to save it.

3. Enables you to earn more money in interest

• A high-yield online savings account at banks like Ally or Marcus may earn you 5x to 10x the national interest rate, allowing your money to grow much faster. In addition, online banks typically do not charge monthly maintenance fees, so you get to keep more of the money you save.  Just make sure that the account is FDIC insured.

PRO-TIP:  Make your savings automatic!  Set up a portion of your paycheck to be directly deposited into your Emergency Savings account. Another option would be to create a scheduled transfer to your savings account for a fixed amount each month.

Final Thoughts

Saving an emergency fund is vital for everyone. It is absolutely essential for financial stability and security.  Emergencies can arise unexpectedly, and without a financial cushion, families can quickly fall into debt and financial hardship.

By establishing clear financial goals, creating an automated savings plan and keeping funds separate, households can ensure that they have the financial security and peace of mind they need to weather a storm. 

It seems more complicated and like another thing to worry about, but it’s much easier to worry about saving money than how you’ll make ends meet in an emergency. Start putting together your savings plan today! I enjoy working with households to establish a savings plan that works for them. Let’s set up a COMPLIMENTARY SESSION (Click on link) using Calendly to discuss your financial goals and how personal finance coaching could help.

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