The standard recommendation for an emergency fund is 3 to 6 months of expenses (some sources even say 6 to 9 months). Whoa, that seems like a lot of money, especially if you have a family to support! Let’s take this in smaller steps. First, you need a place to keep your emergency fund, so plan on opening a new, separate, high interest rate savings account. The reason for the separate account is to make clear to yourself that this is for emergencies only, not for accidentally dipping down into when you spend too much on vacation or that shopping day at the mall. You want it isolated from your regular checking and savings accounts.
Opening a High Interest Rate Savings Account
You should be earning at least 2% APY on your savings. Find out the current interest rate on your savings account. If you are not earning at least 2% APY, it is time to open a new account for your savings, as well as an account for your emergency fund. Bankrate has a useful search tool for comparing savings accounts, so I recommend starting there. There you can enter the details of how much your initial deposit will be, check the boxes for savings and/or money market accounts, enter your zip code, and choose how you want the results to be sorted. When you get the results back, they will first show you their featured results. Click on the “All Products” tab to see many more options. At the time of writing, the highest rate I could find in my area was 2.52% APY. Now this was with an organization I have never heard of before. Personally, I’d be more comfortable signing up for an account with the highest rate from a company whose name I recognize. Additionally, I searched for a low initial deposit, no monthly deposit requirement, and no transaction fees: the result was the HSBC Direct Savings account with a rate of 2.2% APY. (Reminder, this is for informational purposes only and does not constitute advice, I am not affiliated with HSBC and do not have an account with them. I did have a savings account with them several years ago, and it was fine, but I closed it to consolidate my accounts).
Banks will offer incentives for you to open accounts and this is a popular topic for financial bloggers to write about, so feel free to also try using the search term “best high interest savings accounts” along with the current year on your Google search to uncover up-to-date opinions. Remember when you are reviewing these accounts to closely examine the terms for each account offer. Some banks will offer you a cash bonus for signing up to their account, but then they will pay a low interest rate once you have the account (Chase tends to do this).
Also, some accounts have requirements such as maintaining a minimum balance or using direct deposit in order to get the good interest rate. Others require a minimum initial deposit. Further, there may be limits on how often you may withdraw or transfer money from the account each month. An example of such rules: the CIBC Agility Savings account also has a 2.2% APY today, but requires a minimum deposit of $1000 to open the account and limits account holders to 6 transfer/withdrawals per month.
Building a $1000 Emergency Fund
It is time to save. As soon as you can, get $1000 into your emergency fund account. If you don’t have the money to put in there right away or typically feel like you live paycheck to paycheck, this might seem difficult for you. In this case, my suggestion is to act like you are having that emergency right now. Figure out how much you can contribute per week to the account. Think about where you can cut costs in your current lifestyle. Spend a month living more frugally: skip going out to eat for a few weeks and buy only essential foods at the grocery store (leave the chips, candy, and cookies on the shelf). Put off entertainment costs like going to the movies, buying video games, or seeing concerts.
You’ll want to increase your earnings too. At the same time as you are saving, make a few extra dollars: doing a side gig, hold a garage sale, sell some things you own that you don’t use or want any more that still have value on eBay or Craigslist, babysit, walk dogs — whatever you can do to get to $1000 as fast as possible. Don’t like these suggestions? Brainstorm, talk to friends, read financial articles, and watch YouTube videos about side hustles to find what works for you. Knowing that these actions can be temporary will help you push through the extra work involved.
Growing Your Emergency Fund
Once you have saved $1000, you should keep on contributing money to your emergency fund. Think about the time you spent saving that amount and adding money to your account. What was the most effective and least difficult thing for you to do? Continue to do just those few things and for the rest, return to the lifestyle you enjoy. If it didn’t really bother you too much to stop eating potato chips or drinking soda or whatever it was, don’t start back up again. Put that $10 per week in grocery savings into your emergency fund instead. If you liked walking your neighbor’s dog, go ahead and keep doing it and put all the money you earn from doing that into the emergency fund. Decide how much you can save per month and make that an automatic transfer from your checking account into your emergency fund account. You are now working toward building your way up to six months of expenses in your account.
Know Why You Have the Fund
The second part of this process is to know why you have an emergency fund. I want you to think about how you would feel if your car needed a repair you suddenly have to pay for (such as $1000 to cover a new set of tires), you or your child need medical treatment (even dental treatments can get expensive), or you have to buy a plane ticket to get to the bedside of an ill relative or friend. Most likely you are already dealing with an emotion related to the event – anger, frustration, sadness. By having this money already in place to cover the expense, you are buying yourself financial peace of mind. It is one less thing to worry about.
It is also important to position this money in your mind as use for a true emergency. A weekend away on a mini break is not an emergency, though it might feel needed at the time. If deciding in advance what types of things constitute an emergency, then write down a list of possible situations that would be valid reasons for pulling the money out of the account.
A larger amount of money in your emergency fund will give you both a financial cushion and a psychological cushion. It also widens your circle of opportunity. Once you have six months of expenses saved, you will have greater freedom of choice in your life because you have a safety net allowing you to: change jobs, move to a different city, handle larger medical expenses, take extended time off of work for the birth of a child, or cover the cost of taking unpaid time off of work for a few months for any reason.
Taking Charge of Your Emotional Relationship with Money
If not having a large financial cushion creates anxiety in your life or even during the time it takes for you to build that safety net, follow the advice of Ken Honda and create a list of friends that would help you out in an emergency. Do you have a support network in place? Who will be there for you (when the proverbial rain starts to fall)? Start talking to your friends and family about this right now. In the worst kind of disaster, if you lost your home and all your finances were wiped out, whose place could you stay at for a week or even a month? If you feel you need to work further on your emotional relationship to money, read Ken Honda’s book, Happy Money: The Japanese Art of Making Peace with Your Money.
