“Life comes at you fast.”
A quote many of us are all too familiar with due to the COVID-19 pandemic.
From small businesses permanently closing their doors to workers being laid off across the country, the ripple effect of COVID-19 sent financial shock waves through American households for months on end.
Fortunately—due to recent vaccination approvals from the FDA and a second economic stimulus package distributed by the federal government—the country is finally on a slow road towards recovery as we head into the new year.
But, as we reflect on the financial hardships faced by so many individuals and families throughout 2020, there has never been a better time to reevaluate your savings goals and start planning for the unexpected.
Enter: emergency funds.
Establishing an emergency fund separate from your standard savings or checking account helps you stay prepared for life’s unexpected moments, such as your car breaking down, home or appliance repairs, and worst of all, unemployment in the wake of a pandemic.
But how do you get started building an emergency fund when your bank account is stretched thin? And just how much do you need to set aside in this account to be safe should things go down an unexpected path in the future?
At Landmark National Bank, we’ve created this guide to help you get started with an emergency fund. It details what type of bank account your emergency fund should be in, how you can budget for this extra account and everyday tips and tricks on what you can do to ramp up your emergency fund as quickly as possible.
What is an emergency fund?
An emergency fund is a separate savings account for unexpected expenses or financial emergencies. Unfortunately, in a recent survey conducted by Bankrate, researchers found that 21% of Americans say they have no emergency savings at all.
Why should creating an emergency fund be a top priority?
Creating an emergency fund provides you with a safety net when times get tough. Unlike taking out a high-interest loan or using a credit card, emergency funds allow you to pay for life’s necessities interest-free. Additionally, an emergency fund is important to maintain if you are already in debt (e.g., student loan debt, credit card debt, and more), as it can help you avoid borrowing more money.
How to Start an Emergency Fund: 4 Steps
When it comes to starting an emergency fund from scratch, one of the most important things to understand is that saving takes time, commitment, and self-discipline—especially if you are strapped for cash. However, with a solid plan in place, you can start to build your emergency fund without unnecessary stress. Just remember, your emergency fund is for real emergencies only, so avoid the temptation to spend it unless absolutely necessary.
1. Create a Budget
If you haven’t done so already, creating a budget is one of the most important steps to establishing an emergency fund. Calculate your monthly net income (or the amount you take home each month) and deduct all your fixed expenses and variable monthly expenses from that amount.
Fixed expenses include things like:
- Mortgage or rent payments
- Student loans
- Car payments
Variable expenses include things like:
- Eating out
If your income is higher than your expenses, you can easily allocate extra funds towards a new emergency fund. If your expenses are higher than your income, you will need to find variable expenses you can trim down, such as eating out less or canceling unnecessary memberships.
2. Choose the Right Bank Account
After you’ve created your budget and calculated how much money you can set aside for your emergency fund, it’s time to choose the right bank account. Your emergency fund should be easily accessible, which means a savings account—such as an Optimum Money Market Account—is your best bet. Because these types of savings accounts are interest-bearing and allow withdraws, you will be able to passively grow your emergency fund while you add your regular contributions.
Note: To help you stay motivated and eliminate the temptation of withdrawing your emergency funds, our online banking setup allows you to “hide” accounts from your home page. This will keep your emergency money out of sight and out of mind until you need it.
3. Set Up Automatic Contributions
Once your emergency fund budget and bank account have been established, consider setting up automatic contributions. For example, if your employer offers direct deposit, you can likely request for your paychecks to be distributed among multiple bank accounts. By having your emergency fund contribution automatically withdrawn from your paychecks, you won’t have to worry about falling behind on your savings goals each month.
4. Establish Micro-Goals
According to most financial experts, you should have somewhere between 3 to 6 months’ worth of basic living expenses in your emergency fund. While these amounts are great in theory, the thought of saving that much for an additional emergency fund can feel overwhelming for many—especially for those who are paying rent or a mortgage, credit card bills, student loans, car payments, and more.
Rather than setting unrealistic goals for yourself from the get-go, start off small and set a manageable benchmark goal. For example, start off with an emergency fund goal of $500 and work your way up to it. Once you reach that goal, set your next goal to $1,000. Follow this pattern until you reach an emergency fund amount that equals 3 to 6 months’ worth of your living expenses.
Tips on Growing Your Emergency Fund Faster
It’s important to remember that emergencies happen when you least expect them, so try to stay disciplined to grow your emergency fund as quickly as you can.
If you happen to find extra wiggle room in your budget at the end of each month (e.g., you spent less money on variable expenses than you estimated), make sure to push that money towards your emergency fund. This goes for your tax return, too. Because your tax return is outside of your budgeted expenses, consider it extra income and use it to boost your savings quickly.
If you’re interested in contributing even more additional income to your emergency fund, consider picking up a part-time side job. From food delivery to ride-sharing services, there are plenty of opportunities in the gig economy to help you grow your emergency savings quickly.
Start Your Emergency Fund with Landmark National Bank
Establishing and maintaining an emergency fund will not only provide you with a safety net during financial emergencies—but it will also help you shift your mindset on saving money.
If you’re ready to get started building your emergency fund, check out Landmark National Bank’s Smart Savings account or Optimum Money Market account with tiered interest. Both accounts can help your dollar go further as you contribute to your emergency funds each month.
Have any questions about setting up a new bank account with us? Don’t hesitate to find a Landmark National Bank branch near you to chat with one of our friendly team members.