How to build up a family emergency fund

Having an emergency fund on hand of a few thousand dollars is essential for financial stability. Here is an easy 5-step strategy to build yours today.

Families can use an emergency fund as a lifeline to assist during hard times or when unexpected costs arise. With so many Americans out of work, it is a great reminder of why it is important to have one. Right now, families need emergency funds more than ever. Trying to save money can seem daunting when you have a lot of expenses and an uncertain income, but there are strategies to slowly save over time to give yourself a financial cushion.

Imagine if something happened to one of your family members and they required a trip to the emergency room. That easily could cost you thousands of dollars. Would you be able to absorb that payment? Would you still be able to pay rent and buy groceries if you did? The same could be asked for a car repair, damage to your home, or being laid off. To cover items like this it is recommended to have an emergency fund that is worth between six and 12 months of your annual salary. That amount would give you a nice back up plan to pay for your family’s expenses in a worst-case scenario.

Make sure you save the right amount

The key to saving money is having money to save in the first place. Right now, if your family already has a tough time covering its expenses and you live paycheck-to-paycheck, then you need a budget. Having a budget helps families prioritize expenses and spend their money smartly. The other benefit of having a budget is that you can set aside money every month to save and invest!

Being disciplined to a budget is the first step in creating an emergency fund. After you have spent money on essentials like rent, electricity, food, and your car, reserve an appropriate amount to saving every month. That might mean after looking at your monthly expenses you might have to sacrifice money you would spend on more optional items like dining out, video games, or streaming services. It is okay to spend money on those types of items, and you should in moderation. However, they ultimately should not come at the sacrifice of saving for your family. Only you will know the exact number you can save every month. As a rule of thumb, most Americans save between one-fifth and one-fourth of their monthly and annual income.

Open a dedicated high-yield savings account

After you start setting money aside, the next question is what do you do with it? Certainly, you could just let it sit there in your bank account or even in cash, but there are wiser places to put your money. The easiest thing to do is open a high-yield bank account to deposit the money into. The reason you do this is that these accounts will pay you a high-interest rate just for storing your money. That means your money can grow without you even doing anything. If you have ever heard the phrase, “make money while you are sleeping” this is what is meant by that.

The other great thing about these types of accounts is there is absolutely no risk of losing your money either. This is because bank accounts are insured by the FDIC, a government agency that promises to protect your money up to $250k. The interest rates you can get in a high yield account vary by the bank so be sure to do some research and shop around for the best rate. It might not make a huge difference in the short term, but in the long run, a few percentage points make a huge difference.

Automate everything

The best way to stay disciplined to your budget and your savings plan is to not have to think about it or remember to do anything. Set up automatic withdrawals and deposits from your direct deposits every time you get a paycheck. Regular, incremental additions to your savings every two-weeks or every month is the best way to save. You can always save more if you have extra leftover, but the most important thing to do is decide on a regular amount and stick to it, no matter what! It doesn’t matter if that means $500 a month or only $100 a month, you can always increase it over time. If you are not on a regular, predictable pay schedule try your best to stick to these same principles and set aside regular automatic savings.

Save every way you can

In those times when you do have a sudden influx of extra money those are excellent ways to boost your emergency fund. Sometimes when people get a bonus, a tax refund, or perhaps a gift, these are all great opportunities to save. If you are already sticking to your regular savings plan, extra money like these are a nice cherry on top to get ahead of your goals. Plus, if you are already used to not needing those extra-large sums in your budget then the money will not be missed. Another option for padding your savings plan is to pick up a side-hustle or side job. By increasing your monthly income, even if only by a small amount, you can put that money away. Just last week we wrote a great article on the best side-hustle jobs in 2020, check them out.

Start small

By small and simple means, great things can be accomplished. It doesn’t matter if your goal is to save $1,000 or $100,000, don’t get distracted from your goals. Save as much as you can even if it doesn’t seem like a lot. If you don’t start small, you’ll never be able to save big. Just keep in mind, you might not need the money now, but you will thank yourself when the time comes. You don’t want to be one of those families who didn’t prepare when times were good.