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Building an Emergency Fund

Yes, I know I’ve mentioned emergency fund before. It popped up a few times in last month’s blog posts. It’s an important topic and one I have no shame in harping on. Chances are you’ll see it pop up numerous times in the future. To me, it’s a key component in building a financial plan. In fact I believe it should be included in the goal building stage of your plan, if you don’t already have one established.


The hardest part is always the beginning. After all, most everyone from your neighbor to your friend to an online blog is telling you that. It’s something you’ve thought about because you know it’s important. The big question becomes how to start it, especially if income and expenses leave with you little to no surplus each month.

The common thought is your emergency fund should cover three to six month’s expenses. That’s a great goal but depending on your cash flow it may not happen as soon as you’d like. Don’t let that stop you. Instead start small. Find a savings account with a low minimum deposit and low monthly contributions. There are some out there with opening deposits as low as $25 that allow you to set up automatic contributions for the same amount. Be aware of fees. Accounts with low minimums may charge a monthly fee until your account reaches a certain daily limit. However, depending on how much you contribute each month you may hit that daily limit within a few months’ time.

Going with an automatic contribution means every month, no matter what, money is transferring from your main account into a savings account.

Once you’ve found that savings account set up automatic contributions on a monthly basis. I can’t emphasize how important this is. Don’t tell yourself, "Great I’ve set it up and now I’ll transfer money every month! I’ll even set a reminder on my phone to do this." That might work for the first few months. After that, probably not. Things pop up causing you to skip a month here and there, all with the vow you’ll make it up the following month. Chances are that won’t happen.

Going with an automatic contribution means every month, no matter what, money is transferring from your main account into a savings account. No excuses, no promises you’ll make up for the months you’ve skipped. That just won’t happen as it’s done automatically the same time every month. Before you know it, you won’t even pay attention to the monthly transfer. It happens, end of story.

Have your emergency fund account placed in a different bank than your main one. It will prevent you from dipping into it for non-emergencies.

I’ve seen it said that you should set up an emergency fund at a bank separate from your main one. By doing that it keeps it temptation low from dipping into it in non-emergency situations. It’s a good idea to think about, especially if impulse buying is a problem for you. However, before considering this, look into the savings accounts your regular bank. They might have little features that can add up.

One that my bank offers says that for every bill I pay online, $1 is transferred from my checking account into my savings account. It may not seem like much but do enough online bill payments and that can slowly add up.

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