Life is full of plot twists, and unfortunately, they're usually expensive. Car accidents, unexpected job losses, hospital visits that lead to hefty hospital bills, diving in a swimming pool with your phone in your pocket—when emergencies strike, we're almost always paying out of pocket to cover them.
The problem? Over half of Americans can't cover a $1,000 emergency, forcing them to depend on credit cards, loans, and "I-owe-yous" to get through financial crises.
If that sounds like you, hear us out: you don't have to rely on debt like this anymore. You can build a financial buffer, or an emergency fund, to cover you when you need it most. It won't happen overnight. But follow these seven simple steps and you'll build an effective emergency fund.
- Start with a small goal.
- Choose the right savings account.
- Set a contribution minimum.
- Cut unnecessary expenses to save faster.
- Find secondary sources of income.
- Put in a little extra.
- Don't touch it...unless it's a real emergency.
1. Start with a small goal
If you have trouble saving money, or the thought of putting away six months of living expenses intimidates you, then start small. Figure out how long it will take you to save $500. Work toward that goal, and once you hit it, focus on the next $500.
2. Choose the right savings account
The purpose of an emergency fund is to help you get cash fast, meaning you don't want to put it in a certificate of deposit account (CD) or an account that's inaccessible for a fixed term. Nor do you want to invest this money in stocks or mutual funds: you want it to grow a little, sure, but you don't want to risk losing it all.
Instead, consider opening a high-interest savings account. This will keep your money safe, while also allowing it to earn some interest. And if you really want to be smart, keep your emergency fund and checking account at separate banks. This reduces the temptation to draw from your emergency fund, as it can take several days to transfer the money from one bank to the other.
3. Set a contribution minimum
Next, ask your employer (or do it yourself) to automatically deposit a portion of your income into your emergency fund every paycheck. This is, of course, practical, but it's also psychological: by making these automatic deposits, you force yourself to live on a little less every month.
4. Cut unnecessary expenses to save faster
If you want to see more progress, look at your expenses and cut the stuff you can live without. In particular, look for these common culprits:
- Get rid of app and streaming subscriptions.
- Carpool to save on gas.
- Stop eating out and pack your lunch.
- Shop insurance companies and see if you can cut your premium.
- Be mindful of A/C and electricity usage.
- Sell your second (or third) car.
- Buy generic grocery items.
- Eliminate expensive habits (smoking, ordering expensive lattes, etc.)
- Cancel memberships.
- Sell unused items.
5. Find secondary sources of income
If your budget is airtight and you're still struggling to build your emergency fund, then you may need to find a secondary source of income.
Don't worry—you don't have to do jobs you absolutely dread. These days, there are plenty of side gigs, meaning you should be able to find one that fits your talents. For example, if you like drawing, consider making greeting cards and selling them on Etsy. Or, if you're a handy person, offer your skills on Craigslist or use an app like TaskRabbit to find work near you.
Need help finding a side gig? Easy—just sign in to your Thinkflow account and use the free "Income Helper." You can browse a variety of side gigs, anything from babysitting to online tutoring to selling your photos.
6. Put in a little extra
Once you hit your goal, whether that's one, three, or six months, don't stop. Give yourself some cushion by contributing more.
7. Don't touch it... unless it's a real emergency
You're about to spend a lot of time and energy building this emergency fund. So, before you withdraw money from this account, make sure the occasion is a real emergency and not just an inconvenience. Here are some emergencies that are worth spending your fund on:
- Home repairs
- Medical expenses
- Car repairs
- Family emergencies
- Living costs after losing a job
- Unexpected tax bills
- Living costs during or after a natural disaster
Get the Money You Need to Start an Emergency Fund
Look, we get it—starting an emergency fund can be tough. After all, you can't just make money "appear" if you're struggling to pay the bills.
If this sounds like you, try Thinkflow.
Thinkflow puts your income and expenses in one place, helping you see exactly where your money is going. Who knows—you may find that if you spend a little less on groceries every month, you can have a fully stocked emergency fund in just a few months. And if you absolutely can't squeeze another dime out of your income, Thinkflow will even show you part-time jobs and gigs, as well as help you see if you're getting paid what you should.