Secrets to Building an Emergency Fund

By Lynnette Khalfani-Cox, The Money Coach®

Having an emergency fund is a surefire way to protect you and your family against unforeseen events. A solid emergency fund can give you a buffer if things go wrong — like when your car breaks down, or something in your household needs repair.

Without some extra savings, however, these short-term problems can plague you for what seems like forever. If you lack emergency funds, in a financial pinch you may also find yourself racking up credit card debt or borrowing from family members. Needless to say, you’d probably rather avoid either of those scenarios.

So how can you stash away the funds you need to deal with life’s inevitable challenges?

Here are three secrets to building an emergency fund.

Secret #1: Habits and consistency beat huge amounts of cash

In order to build a healthy emergency fund, it’s important to understand that your habits, and being a consistent saver, matter far more than the specific dollar amount of cash you’re currently able to sock away each month.

But unfortunately, too many people feel defeated before they really even get started because conventional personal finance wisdom suggests that you “should” have a minimum of three months worth of expenses set aside in an emergency fund. Some experts even recommend six or 12 months worth of savings. So some people (erroneously) think that if they’re not saving $250 to $500 a month or more, they must be wasting their time, or perhaps doing something wrong.

Obviously, the bigger the emergency fund you amass, the more financially secure you’ll be if you have to weather some unexpected economic storm. But if you don’t have anywhere near three months’ worth of expenses — or even a one month emergency fund — don’t despair. These are guidelines or rules to tell you an optimal savings scenario.

You’re supposed to work toward having that three-month cushion. But there’s no shame in acknowledging that you do not currently have that amount saved. And that’s OK. Just strive for the goal you set as an ongoing target. And then save what you can afford little by little. If it’s $25 a month, or maybe $50 or $100 monthly, that’s perfectly fine.

What is most important is that you get into the habit of savings, and that you train yourself to become a disciplined saver who sets aside money consistently, no matter what. Once you get into the habit of savings, the money will certainly build and you’ll ultimately reach your emergency savings goal.

Secret #2: If you don’t see it, you can’t spend it

Another secret that successful savers know is that if they don’t “see” or “get” the money that that they’ve earned, they can’t spend it. So they make savings automatic.

The easiest way to automate your savings, and grow your emergency fund, is to have a fixed amount of money automatically taken from your paycheck and deposited into a savings account that you don’t touch — except in the event of a true emergency.

Secret #3: Money isn’t meant to mingle

If you launched a small business, or even started a side-hustle as a freelancer, any accountant worth his salt would tell you: don’t mix or “co-mingle” your personal funds with your business funds.

Keeping your personal finances separate from your business finances is cleaner from an accounting standpoint, plus it helps show the IRS all the precise income and specific expenses that apply only to the business.

This same philosophy should be applied to growing your emergency fund: don’t mix or mingle it with other funds!

Without this precaution, it’s simply way too easy to lump together all your savings, or event to put emergency savings into a checking account, and then lose track of what money is supposed to be used for various purposes.

So instead of having one generic savings account or mingling your savings and spending money together in a single checking account, do yourself a financial favor: open a stand-alone savings account that is designated for just one purpose, serving as your emergency fund.

By having this specially earmarked account, you’ll also be able to better monitor your financial progress, which will help you reach your emergency savings goal sooner rather than later.



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Extra Credit provides general information to help improve our Member’s financial lives. Every situation is different, so please contact us for guidance on your specific needs. The advice provided in Extra Credit is not intended to serve as a substitute for speaking to a loan representative, financial advisor, or BALANCE counselor who can help tailor a solution for you.

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