One of the fundamental things you need — especially in preparation for what is likely to be a recession — is an emergency fund. Even if we don’t actually enter a technical recession, it is important to have an emergency fund. It will cover you in the event that something unexpected comes up. (I wrote about how big of an emergency fund you should have here, in response to a reader question.)
But how do you start building an emergency fund? Very few people have a few thousand dollars to use to get the emergency fund up to three to six months of expenses. The important thing, though, is to start building your fund, and to work on it regularly. You’d be surprised how much you can amass if you just work on it. Here are some tips for building your emergency fund:
- Automatically set money aside. You can do this by having a small amount deducted from your paycheck and put into a (preferably high yield) savings account. If you do not have that option, you can usually set up an automatic transfer from your checking account into your savings account. Build the emergency fund money into your regular household budget.
- Cut unnecessary spending. Some personal finance experts estimate that you waste about 15% of your monthly income. Look at your budget and put that wasted money to work for you in an emergency fund located in a yield savings account.
- Make getting into your emergency fund a little harder. My emergency fund is located in an account opened online at a bank with no branches in my town. I do not have an ATM or debit card attached to that account. Getting to my emergency fund means that it takes three or four days to initiate a transfer. It makes me stop and think about whether I’m in a true emergency.
- Collect extra change. One thing that we do is try to pay in cash for small, individual purchases. We save the change from these purchases. Every few months, the change adds up to between $50 and $100 that we can add to our emergency fund — on top of what we’re already doing.
- Save money from promotions, raises and bonuses. When you get extra money, don’t increase your expenditures to match. Instead, live as you did before and save most of the money.
Do you have any tips for building an emergency fund?