Starting Your Emergency Savings Fund

What do car accidents, house fires and layoffs all have in common? They’re all unexpected, uncontrollable and urgent life events that occur in our world every day. What you can control is the emergency money you save to prevent these situations from having a negative impact on your financial status. 

An emergency fund is a safety net that can help cover unexpected expenses without breaking your budget or taking on debt. Emergency savings are meant to be kept separate from your other long-term savings goals and only used in case of an emergency. 

Budgeting for an emergency fund

According to The Federal Reserve, nearly four in 10 Americans say they wouldn’t be able to afford a $400 emergency expense. Setting aside cash for unexpected events is important for long-term stability and can give you some peace of mind.

The rule of thumb is to save at least three to six months of living expenses in an emergency savings fund. The amount of emergency cash you should budget depends on your lifestyle, committed expenses, household size and income. 

So how much emergency cash do you need? Here’s a simple way to figure out how much emergency money you should budget.

Step 1: Figure out your total necessary expenses each month

These expenses include your rent or mortgage payment, utilities, car payment, gas, groceries, phone bill, and any other necessary payments made on a monthly basis. For this example, we are going to assume $2,000 a month of expenses. 

Step 2: Pick the number of months you would like this emergency fund to cover

Although we recommend saving enough to cover at least six months’ worth of expenses, we are going to use three months for this exercise. 

Step 3: Choose how long it will take to fund an emergency savings account

This number is based on the amount of money you intend to save per month. For this example, we will say we want to reach our emergency money goal in three years.

Step 4: Do the math 

Multiply monthly expenses by the number of months the emergency fund will cover. 

$2,000 * 3 years = $6,000 emergency cash needed

To determine the number of months you’ll need to save to fund your emergency account, multiply the number of years spent saving by 12. 

3 years * 12 months = 36 months to fund savings goal 

To determine your monthly contribution, divide the emergency savings goal by the number of months needed to fund your savings fund.

$6,000 / 36 = $167 monthly contribution  

In this example, you need to save $167 every month for three years to have $6,000 in emergency savings. This doesn’t account for any interest accrued from your savings account. 

Where to stash your emergency cash 

Now you know how much money to save to build up your emergency savings, you’ll want to decide where to save it. It’s smart to start a separate account for your emergency fund to avoid the temptation of dipping into it. A few safe options for storing emergency money include:

  • Savings account: Needham Bank offers a variety of no-fee savings accounts that allow you to access your money easily in case of an emergency. Many offer better interest rates than typical checking accounts and are fully insured. 
  • Money market account: This type of savings account, also called an MMA, is like a cross between a savings and checking account in that you can earn interest and withdraw money up to six times a month via a debit card or checks. 
  • Certificates of deposit: Another option is to tie up some of your emergency savings in a certificate of deposit, or CD, as a way to earn interest on money you’ve already saved and can afford not to access for a while. You’ll get a guaranteed rate of return based on your initial deposit and term selected. You may also consider laddering CDs so they mature at different dates, giving you access to your money at different dates. 

These savings options will help you dissociate yourself from this fund, as it is only meant for emergencies. If your emergency fund ends up being used for recreational purchases, such as vacations or new cars, you will no longer be protecting your finances for emergencies. 

Emergency savings strategies 

Depending on your situation, it may be difficult to set aside money for an emergency savings account. Here are a few strategies to help you save more for a rainy day.

  1. Make savings automatic: Use direct deposit to automatically set aside a portion of your paycheck into your Needham Bank savings account or MMA each month.
  2. Evaluate and reduce monthly expenses: Look at non-essential costs that can be substituted for less expensive alternatives or cut them out completely. Instead of buying coffee every morning on your way to the office, try making coffee at home or wait to drink the coffee at work. Evaluate any subscriptions that may be non-essential and try cooking more at home and eating out less. Your emergency savings account will thank you later.
  3. Sell used items: If you haven’t used something for six months, why not sell it? There are a ton of free apps and websites now that help you sell unwanted items for cash. You could also visit a consignment store or have a good old-fashioned tag sale. Allocate the money you make to your emergency account.  
  4. Get a side hustle: Do you have a talent you could use to make money or some extra time on your hands? Find ways to supplement your income by getting an odd job or side hustle. The Penny Hoarder shares eight off-the-beaten-path ways to make a little extra cash in the Boston area. Check out Odd Job Nation for a few other ideas for part-time work.
  5. Re-calculate your budget each year: Expenses and circumstances change in life, so make it an annual task to make sure you’re saving the right amount. 

A fully funded emergency savings account gives you the ability to deal with problems in a level-headed manner and helps you avoid high interest loans (like payday loans) or racking up credit card debt.

This approach will enhance your lifestyle both financially and emotionally, giving you peace of mind during the times you need it the most. Contact a Needham Bank representative for help finding the best savings account for your emergency fund.