Starting Your Emergency Savings Fund

What do car accidents, house fires and layoffs have in common? They’re all unexpected, urgent life events that occur in our world every day. While you can’t always control these circumstances, you can control the emergency money you save to provide financial stability during difficult times.

An emergency fund is a safety net that can help cover unforeseen expenses without sending you into debt. Emergency savings should be separate from your other long-term Savings accounts and only used in case of an emergency. Follow these tips from C&N to start your emergency savings fund.

Budgeting for an Emergency Fund

Four out of 10 Americans wouldn’t be able to cover a $400 emergency expense, according to The Federal Reserve. Setting aside cash for unexpected events is important for long-term stability and can bring you peace of mind.

The general 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.

How Much Emergency Cash Do I Need? 

Here’s a simple way to figure out how much emergency money you should save. 

1. Calculate Your Monthly Expenses: These nonnegotiable expenses include your rent or mortgage payment, utilities, car payment, gas, groceries, phone bill and any other necessary payments made on a monthly basis. In this example, we are going to assume your expenses total $2,000 a month.
2. Pick the Duration of Your Emergency Fund: Choose how many months you would like your emergency fund to cover. Although you should generally plan to save at least six months’ worth of expenses, we are going to use three months for this exercise. 
3. Determine How Long You Will Need to Save: The amount of time it will take to build your emergency fund is based on how much money you intend to save each month. For this example, let’s say we want to reach our emergency savings goal in three years.
4. Do the Math: A few simple calculations will help you understand how much money you need to save every month to reach your goals. You can also automate the process by using C&N’s Emergency Savings Calculator.
   1. Multiply monthly expenses by the number of months your emergency fund will cover. $2,000 * 3 months = $6,000 emergency cash needed
   2. To calculate the number of months over which you’ll need to save, multiply your savings goal in years by 12. This will tell you how many monthly deposits you’ll need to fund your emergency account. 3 years * 12 months = 36 months to fund savings goal 
   3. Determine your monthly contribution by dividing your emergency savings goal by the number of months needed to fund it. $6,000 / 36 months = $167 monthly contribution

In this example, you need to save $167 every month for three years to end up with $6,000 in your emergency savings. Remember that this doesn’t account for any interest accrued from your Savings account.

Where to Stash Your Emergency Cash

Now that you know how much money you need to save, 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. Here are a few safe options for storing emergency money.

• Savings Account: A Savings account will allow you to access your money easily in case of an emergency and offers better interest rates than a typical Checking account. 
• Money Market Account: This type of Savings account, also called an MMA, is like a cross between a Savings and Checking account. With an MMA, you can earn interest and withdraw money up to six times a month via a debit card or checks. 
• Certificates of Deposit: You can tie up some of your emergency savings in a CD 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 selected term. You may also consider laddering CDs so they mature at various times, giving you access to your money at different dates. View C&N’s CD rates and use our calculator to estimate how much interest you can earn.

These options will give you a “set it and forget it” approach to your emergency fund so you can protect your money and earn interest while saving. This can help you resist the temptation of dipping into your emergency money.

Emergency Savings Strategies 

It can sometimes be difficult to set aside money in an emergency savings account. Here are a few strategies to help you save more for a rainy day without straining your budget. 

1. Make Savings Automatic: Use direct deposit to automatically funnel a portion of your paycheck into your Savings account or MMA each month.
2. Evaluate and Reduce Monthly Expenses: Look at non-essential costs you can replace with less-expensive alternatives or cut out completely. Try making your morning coffee at home, eating out less often and canceling subscriptions you rarely use. Your emergency savings account will thank you later. 
3. Sell Unwanted Items: If you have any clothing or possessions that have been sitting around unused, consider selling them for some extra cash. Free apps, websites and consignment stores make it easy to rehome unwanted items. A good old-fashioned tag sale is also an option. Deposit the money you make into your emergency savings account. 
4. Get a Side Job: Odd jobs and side hustles can be great ways to supplement your income if you have the time. Explore opportunities through recruiting websites, job finders and local temp agencies, or pursue freelance work if your talent is artistic. You can also browse Odd Job Nation for potential side hustles in Pennsylvania or New York.
5. Recalculate Your Budget Each Year: Expenses and circumstances are ever-changing, so make a habit of balancing and recalculating your budget every year to be sure you’re saving the right amount. It’s always smart to know how you’re tracking toward your goals, and you may need to make an occasional adjustment. C&N’s Savings Goals Calculator can help you keep tabs on your progress.

A fully funded emergency savings account provides added security if something unexpected happens and helps you avoid high-interest loans and credit card debt. Making this smart financial decision now will pay off in the long run and help you prepare for every possibility. Contact C&N for additional guidance on how to invest your emergency money or visit one of our branches in Pennsylvania or New York.