How To Start An Emergency Fund (And Stick With It)

In Case Of Emergency Break Glass

Photo: noaz / flickr

Whenever I’m asked for a single piece of financial advice for someone, I usually offer up “spend less than you earn.”When they inevitably ask me for something more specific, I tell them “start an emergency fund and stick with it.”

An emergency fund is one of the best financial tools a person can have. It makes the ups and downs of day-to-day real life so much easier to get through. You’re essentially taking a bit of money from when times are good and putting it aside for when things aren’t quite going so smoothly.

The challenge with emergency funds is simply getting into the routine of putting money aside for it. I’ll be the first to admit that if I had to manually go to the bank each week and put some money into an emergency fund, I’d likely fail at it within a month.

Instead, I’ve used automatic transfers to keep my emergency fund full for years now. It’s such an easy technique to set up and it comes through for you in a big way when you really need it.

All you have to do is open a savings account at a bank somewhere, set up an automatic transfer between your checking and savings accounts, make sure that you’re not pushing your checking account balance down to zero with any regularity, and sit back and wait. Let’s look at the steps.

First, you need a savings account with which to hold your emergency fund. If you don’t have a savings account at your current bank, that’s certainly a possibility, but I found back in my bad spending days that having money in my savings account at the same bank is often a temptation. Thus, I suggest using an online bank like ING Direct for this.

Regardless of where your savings account is, you need to be sure that at least one of the banks offers the ability to easily set up an automatic transfer into or out of an account. You’re going to want to set up a transfer that moves $10 or $20 a week from your checking account into your savings account. A bank that accommodates this makes it very easy – a bank that doesn’t makes it nearly impossible. This is why it’s useful to choose a good bank for your emergency fund.

Once you have your account and the automatic transfer is set up, just be vaguely mindful of it. Don’t let your checking account balance get low enough so that the automatic transfer has any danger of causing you to overdraft. Aside from that, just forget about the emergency fund.

Then, when an actual emergency comes along – say, a car problem or a period of unemployment – you have a wad of cash on hand to handle that emergency. Just transfer the cash you need out of your emergency fund and take care of the issue.

If you’re putting in $20 a week, for example, you’ll have a little over $1,000 in your emergency fund at the end of the year. That’s plenty of cash to handle an unexpected car repair or take care of an unplanned medical bill.

Some people worry themselves about how big an emergency fund should be. I don’t think that’s really too much of a concern. Just set up the automatic transfer and forget about it, knowing only that after a few months, you’ll have a nice pot of money to help you with emergencies that’s constantly replenishing itself. It’s not only a mental relief, it’s also an incredibly useful financial tool.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap.”

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