Everyone should have their own emergency fund, but if you don’t already have one then you are in the right place. Keep on reading to find out how to create your own emergency fund.
Before we get into how to create an emergency to first be clear on what an emergency fund is.
An emergency fund is money that is saved and set aside specifically to ensure you have money in an emergency. This money should not be touched in day-to-day life. Instead, this money should only be used in a genuine emergency.
Now that you know what an emergency fund is it is now time to learn how to create your own emergency fund.
1. Work out how much money should be in your emergency fund
Different financial experts have different responses to how many months of savings you should have in your emergency fund. The majority of personal finance experts suggest between 3 to 6 months, but Suze Orman suggests 8 months.
Only you can decide how many months you feel you need in your emergency fund.
Once you know how many months’ worth of expenses you want to be saved in your emergency fund, you’ll need to have an accurate figure your monthly expenses.
A great place to start is by looking at the last three months’ worth of activity in your bank account and on your credit cards (if you have them).
Go through the transactions and categorise your spending so you start to understand how much you spend on housing, travel, food, health, entertainment, leisure etc.
2. Work out how much you can save each month
Now that you are clear on how much you need to save in total it is time to work out what you can save each month. Hopefully, by going through your transactions in Step 1 you now have a good idea about how much you spend each month. Now it is time to compare that to how much money you earn each month and work out what you can save.
Ideally, you are spending less than you earn each month (ie you are living within your means). In this situation, you should easily be able to start saving every month towards an emergency fund. You can choose an amount that feels comfortable for you.
If, unfortunately, you are spending more than you earn then this step will be difficult. You’ll have to go over your expenses and work out where they can be reduced. You’ll need to create a new budget that ensures you are able to start saving towards your emergency fund, even if it is a very small contribution in the beginning.
3. Create a specific place for you to save your emergency fund
Your emergency fund should be separate from your usual bank account. Some people will use another bank account, whilst other people will use a saving account. The important thing is that your emergency fund should be easily accessible, but separate from your day-to-day money. You need to be able to easily distinguish the difference between your everyday disposable income and your emergency fund savings.
4. Set up an automated transfer
Once you’ve decided how much you are saving each month and where you’ll be saving your money it is time to make the process easier for yourself with automation.
The easiest way to ensure that you actually save the money you have worked out you can save from step 2 is by setting up an automated transfer. If you are paid monthly then set up an automatic bank transfer from your main bank account to your emergency fund for the day after you are paid.
5. Stick to the plan
Building an emergency fund will take time. Obviously, the length of time will depend on how much you need to save in total and how much you are saving each month. Whilst you are building your emergency fund it can be tempting to dip into it, but try and stick to the plan. Remember that creating an emergency fund will help you financially in the long-run and therefore whilst building it you should only go into your emergency fund for a genuine emergency.
There you have it. You know now how to create an emergency fund.
Want to get your personal finances under control? I’m passionate about women having a good understanding and relationship with money. With that in mind, PropelHer’s Book Club reads a money book every single year.
2016 – Get Rich, Lucky B*tch by Denise Duffield-Thomas.
2017 – Nice Girls Don’t Get Rich by Lois P. Frankel, PhD.
2018 – Money by Rob Moore – Check out my review here.
2019 – Your Money Or Your Life – Check out my review here.
