Saving up an emergency fund can be a tricky endeavor, especially when you have so many other financial goals to meet and bills to pay off.
Solos Advisor knows that there are many questions people ask such as:
How do you know how much money to set aside? How long will it take to reach your savings goal?
In this guide, we’ll walk you through the steps of calculating how much you need to save and also help you figure out ways to put more money into your rainy-day fund each month.
Begin with an Emergency Fund
Of course, setting up an emergency fund is probably one of your top priorities if you’re saving money. But how much do you need in your rainy-day fund and what should it include?
The most common advice is to put away three to six months’ worth of living expenses.
But that might not be realistic for everyone.
If you don’t have enough saved up, then consider cutting costs by lowering your retirement savings contribution or canceling cable to free up more cash.
Whatever it takes to make room in your budget for at least three months of living expenses! This will help keep your stress levels down and give you a little breathing room should an emergency arise.
Add Regularly, Minimize Fees
The easiest way to build up your rainy-day fund is to add money on a regular basis and let compound interest do most of the work.
If you make it easy on yourself, you’ll rarely ever need to touch it, but if something unexpected comes up, you’ll have cash ready and waiting.
Ideally, saving in an FDIC-insured account that pays some sort of interest rate; even just 1% will help shave off hundreds or thousands of dollars over time.
Always minimize fees:
For example, there’s no reason to go with a high yield savings account that charges monthly fees if you don’t plan on touching your rainy day fund anytime soon.
Instead, go with one that doesn’t have any minimum balance requirements or hidden costs.
What to Include in Your Emergency Fund
One of your top priorities should be establishing an emergency fund. Here’s what you need to know to build one.
An emergency fund isn’t meant as an extra stash of cash.
It should cover your expenses for three to six months, depending on your needs.
That’s why it’s important that any money designated toward an emergency fund is separate from other accounts and can be accessed quickly in case of dire financial need.
While some people like to keep their emergency savings in cash (either in a checking or savings account), others prefer investments that can grow over time, while still being accessible on short notice.
While there are no hard-and-fast rules when it comes to how you manage your rainy-day fund, experts recommend including:
Three months of living expenses:
Experts say that three months’ worth of living expenses is ideal. This will cover most emergencies and ensure that you don’t run out of money if you lose your job or encounter another financial crisis.
An additional six months’ worth of savings:
Experts also suggest having an additional six months’ worth of savings in case unemployment lasts longer than expected.
It’s also important to keep in mind that if you have debt payments (such as student loans), credit card bills, or other recurring monthly payments, these should be factored into your emergency fund amount.
Why You Need an Emergency Fund
Your rainy day fund is your just-in-case savings account. It should cover any unexpected expenses or emergencies.
The goal is to make sure you don’t go into debt when something happens outside of your control.
Things like medical bills from an accident, surprise home repairs, or losing your job and having to pay for unemployment.
Experts suggest setting aside enough money so that if you lose your job and had to live off of your rainy day fund for 6 months, you’d still be able to cover all of your expenses—and then some.
Saving Without Making Sacrifices
When it comes to saving money, we often think about how to do it without any sacrifices.
But in reality, there are some things you just can’t cut out of your budget.
Instead of focusing on eliminating everything that costs money, look at ways to create small wins in certain areas where you can free up more funds for savings and take steps that don’t require as much sacrifice.
By focusing on creating these small wins, you should be able to increase your savings while also reducing some other expenses.
Final Thoughts
With savings as a priority, you can put your rainy-day fund to work for you.
If you’re saving up for an emergency or other financial goal, don’t forget about compound interest and the time value of money:
Your money will grow over time—if it’s invested wisely—and that growth will make it easier to reach your goal.
Time is working against you, so take these steps before it’s too late:
Choose what method is best for you to save regularly (Saving on payday is ideal because it forces discipline and ensures you won’t dip into those funds.)
Take advantage of compounding interest by investing any extra cash in a high-interest savings account such as CDs. This money is also easily available if there ever was an unexpected expense or opportunity.