Young couple calculating home finances

Saving for a rainy day is one of the most important financial decisions you’ll ever make. Without an emergency cash reserve, unexpected costs like a leaky roof or unexpected medical bill could easily drain your checking and retirement accounts, and pile on more debt. When the time comes to use some or all of your reserve, you’ll be glad you had the funds available. Here’s how to get started building your rainy day fund.

How do you start an emergency fund?

Start by setting your intentions. Maybe you’re saving to repair or replace an appliance, your roof, or simply for a true unknown. If you’re wondering how much you should have in your emergency fund, financial experts recommend saving three to six months of basic living expenses. An emergency fund calculator can give you a stronger idea of how much savings you need to have by factoring in emergency spending needs and essential spending needs, should your income be interrupted.

Savings strategies

Once you’ve committed to your savings plan, think of where the rainy day money will come from, while ensuring you can still meet your monthly financial obligations. Consider setting aside a portion of each paycheck — maybe $25 — and have it directly deposited into your designated account. Keep a small amount in a Share Savings Account for easy access, in case you need the funds in the short-term to unexpectedly pay for new tires, for example. Choose a Money Market Account, if you have longer-term just-in-case savings goals. Plus, these options earn dividends on your behalf. Out of sight and out of mind is a good rule of thumb for saving. You may never miss the money you don’t see.

Another trick: Look for small nips and tucks in your monthly budget where you can save money to put into your emergency fund, such as preparing meals and making coffee at home instead of eating out or visiting a coffeehouse. Next, make a list before grocery shopping to control impulse spending.

Seek a rate reduction from creditors and pay off credit card debt. For example, making minimum payments on a $1,000 card balance at 20% interest costs you an extra $200 each year that you could be saving. In fact, if you are paying down high-interest loans, consider a lower-rate debt consolidation loan, like a Open-End Signature Personal Loan, to help you save on interest payments and put more money away.

Finally, make good use of any large sum of money you may come into. Remember, if you’re putting funds away in a dividend-bearing account, you’re making money on your money. Consider stashing part, or all, of any tax refund you may receive toward your emergency fund. Similarly, deposit any bonuses you receive into your account. And if you get a pay raise, increase the amount you’re contributing to your emergency fund and continue living off of your existing budget.

How long does it take to save for an emergency fund?

That rainy day savings goal will take time to reach. Try breaking down your goal into smaller, more manageable targets. Start with a plan to save $250 to $500 over the course of several months. Once you’ve hit a small savings goal, repeat it. Along the way, track your spending and revisit your intentions. To help you stay focused, look for assistance from a digital tool like a budgeting app or similar online software, so you can see where your money is going.

Keep in mind that digital tools are only as good as the effort you commit to them. It’s important to be 100% comfortable with your decision to save. This way you’ll be more likely to stick to your budget and stay on track to meet your goal.

Use your savings, if necessary

An emergency fund is just what you need to weather a crisis. Be clear on what constitutes an emergency. Large car repairs, appliance repair or replacement, and loss of employment all qualify, for example. Resist the temptation to splurge when it’s unnecessary and honor the intended purpose of your fund.

However, when emergencies do arise, remember to use your reserve savings. Don’t sink yourself into debt when you have the cash available. Once the crisis has been resolved, go back to rebuilding your rainy day fund. 

The advice provided is for informational purposes only. Contact a financial advisor for additional guidance. 

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