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What would you do if you received a unexpected medical bill in the mail? Or your car broke down and needed significant repairs? Or learn that a family member is ill and you need to fly across the country to be with them? Do you have an extra $1000 or more saved up in an emergency fund to pay for this?
If you said no, you are in the majority! Nearly 56% of Americans cannot come up with $1000 should an emergency arise.
We hear over and over again that we need to have an emergency fund, but what is that? And how can you quickly build up an emergency fund starting today?
What is an Emergency Fund?
First off, it is important to understand exactly what an emergency fund is.
Your emergency fund is separate account that contains enough money to get you out of an unexpected financial situation. This amount varies for each individual or family, but $1000 is a great place to start.
While it should be easily accessible, this account should not be linked to any other account. It needs to be separate and only used for emergencies. Ideally it is money you “forget” about until a need arises.
What an Emergency Fund is NOT
While it is helpful to know what an emergency fund is, it’s even more important to understand what it is NOT
An emergency fund is NOT:
- For a vacation
- To pay off debt
- To treat yourself on a shopping trip
- Christmas spending money
- Your credit card
These are all things that should eb budgeted or saved for outside of your emergency fund.
The last point is one of the most frequently misunderstood. So many people believe that they have a credit card to use for emergency purposes, but that is not what a credit card is for. That is the use of your emergency fund.
Not to mention many people who have a credit card “for an emergency” often have their card maxed out, so it’s not even available to use if there was an emergency.
So, if you have been using your credit card as your emergency account, stop it right now!
Why Do You Need an Emergency Fund?
For emergencies silly!
While it is good to plan ahead with our finances, it’s not always possible to look into a crystal ball and see into the future.
Medical emergencies or car troubles are two of the more common financial burdens that come unexpectedly, but you can plan for them.
An emergency fund can take some of the stress of because you know if something were to happen, you have a small chunk of money ready to offset a financial burden. It is an important step to reaching the “financial freedom” that a lot of people are searching for.
How to Quickly Build Up Your Emergency Fund
So now that you understand what an emergency fund is and why you should have one, the next step is to actually build one. It’s recommended to build up your emergency fund as fast as you can, because once you’ve got it, you can move on to your next financial goal.
Here are some ideas of ways you can build your first $1000 of emergency fund quickly:
1. Clear Out Unwanted Items
Our homes are filled with clutter and plenty of items we really don’t use anymore. You can sell any of these unwanted (and in good condition) items on Facebook Markets place, on online reselling sites, or host a garage sale.
This can be a fantastic way to clean up your home and build up your emergency fund. Take a look around. What do you have that you no longer need? Then once you’ve gathered a few items do some research on pricing and sell away! I think you will be surprised how quick you can build up a nice chunk of cash to start your emergency fund.
2. Automate Your Savings
The less work you must do, the better! While you’re working on building up your emergency fund, set your accounts up to automatically move a set amount of money to your emergency account each week. It can be a little or as much as you like. I recommend starting with about $10-$25 a week or biweekly, but you can choose the amount that works best for you. This small amount will hardly be missed and before you know it your account will begin to grow without any work from you!
3. "Round Up" Purchases With Your Bank
Some banks allow you to round up each of your purchases to the nearest dollar and move the change into a savings account. So, each time you purchase groceries or coffee or whatever you are buying, the spare change gets taking from your regular account and adds into your emergency fund. Like automating your savings, this small amount of money will hardly be noticed by you and will help build a great foundation for your fund. When I started doing this, I was adding about $5 each week, but this can change depending on your spending habits.
4. Reduce Your Spending
Impulse buying can be your worst enemy when it comes to building up your emergency fund. Thinking of all the items you purchase during a given week. Is it a necessity? Or a want? If these things, such as your morning smoothie or coffee run, can be lived without consider alternatives. Could you make a smoothie at home three times a week and put that money in your emergency fund instead? Or learn to make your favorite café drink at home? I am not saying to completely give up the things you love, but to reevaluate how often you indulge in spending that could be saving instead.
Another way to do this is to have a “no spend month”. This means no purchases outside of basic groceries, rent/mortgage, bills, etc. Anything additional should be avoided for one month. At the end of the month, take the money you would have spent and add it to your emergency fund. I think you will be surprised at just how much you could save!
5. Earn More Money
If you are motivated to get this fund going there are plenty of ways to increase your income and add some extra money to your emergency fund.
The easiest and first place you should check out is to go to your current job. Can you work some overtime every other week? Or are there extra shifts or tasks you can do to earn some money. Let your boss known you are looking for some extra work and they can keep you in mind if something else comes up.
If picking up extra at your current job is not an option, look at your current skill set. Is there something you can offer as a service in exchange for payment? Do you like to create art on the side that you could sell? Do you love children and could offer babysitting to your friends and neighbors? Or maybe you love to do yard work and could help others in their gardens during the summer months? There are so many things you can do!
Check out my post on reasons why everyone should start a side hustle to get started!
Building up your emergency fund is so important to your financial security and should be a priority for you and your family. You will be surprised at how quickly you can build it up to give you peace of mind for the future.
