More than half of Americans have less than three months' worth of expenses covered in an emergency fund, according to Bankrate's July 2021 Emergency Savings Survey. That total includes 1 in 4 Americans who indicate having no emergency fund at all.
Creating an emergency fund is an essential stop on the road to financial freedom. Yet often, people think they can't afford to make an emergency fund.
Ideally, you should have three to six months of expenses tucked away into a savings account. An emergency fund should cover your basic living necessities including, mortgage or rent, utilities, and groceries. According to the Bureau of Labor Statistics, that amounts to $1,800 a month for the average household. Yours could be lower or higher depending on where you live and the number of people in your home. It's a good idea to cushion that amount to account for job search expenses or health-related emergencies.
Where should you keep this account?
Ideally, you should open a new savings account to keep this off-limits emergency fund safe from your other accounts. Having a separate account should prevent you from regularly making withdraws from savings to cover non-emergency expenses.
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 reasonably low for savings accounts, but if you choose a Money Market account, you could earn extra-high yields to help you reach your savings goal even faster.
Looking for a place to house your emergency fund?
How to get started
It is okay to start small and not meet your emergency savings goal 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 lawn care 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.
Reduce your expenses.
Take a look at your current costs and see where you can make cuts. Could you cook dinner at home three nights a week instead of ordering in? Could you cut the cable cord? Could you skip upgrading your phone the next time a new version is released? Reducing these expenses could save you a significant amount every month, which you could deposit in to your emergency fund.
Automate your savings.
An automatic transfer is plain and simple – set it and forget it. Have money moved from your checking account into your emergency savings account automatically on a weekly or monthly basis. The amount and frequency are customizable – so, choose an amount and time frame that works best for your budget.
Change your lifestyle.
Consider shopping for clothing on second-hand apps like Poshmark or ThredUp. You can often find the exact item that you need at much lower price point. Eliminate the cost of full price clothing and put that money towards your emergency fund.
Turn your unused items into cash.
Purge your closets, garage, and attic and consider what you haven't used in the past year. Sell things that you no longer use on Facebook Marketplace or Craigslist.
Need something? Ask friends and family. Not only is this a great way to support the environment, but it will also help you completely avoid spending money on a necessary purchase.
Save your tax refund.
The average American federal refund is $2,711, and that's a lot of money that could make an excellent start to your emergency fund.
Building your emergency fund is a huge accomplishment and one that proves you're ready to take control of your financial future.