As a young adult, there is a lot to figure out and get started on, especially when it comes to the financial side of things. One of those such things is an emergency fund. It is an essential aspect of every adult’s financial portfolio and should be given the attention it deserves.
To set up an emergency fund, start with figuring out how much you need to save up. Then, you need to open and place that money in an account like a High-Yield Savings Account. Once you have the account open you need to create a funding plan, that will actually get to the fund amount that you want to reach. It’s a simple process, but there are a few smaller important steps that I will explain in detail below.
So let’s dive right in and learn about setting up and creating an emergency fund savings plan!
What Is An Emergency Fund and Why Is It Important?
An emergency fund is for getting you through an unexpected loss of income or covering large unexpected one-time expenses.
The emergency fund’s primary purpose is to ensure that you have the money you need to cover all your core financial expenses if you lose your job or method of earning income.
How Do You Set Up An Emergency Fund?
Figure out your monthly fixed expenses
You begin with figuring out your goal amount for your emergency fund. If you don’t know what your monthly fixed expenses are, figure that out first. If you don’t currently track your monthly expenses to the dollar, think about starting that as well.
There are plenty of apps out there that can help you do so. YNAB (You Need A Budget) and Mint are two great apps, so check those out. I personally use YNAB and it is such an amzaing budgeting app. Its great for new adults and is a tool that can be used to help you set up a strong financial life.
If, interested here is my referral code to YNAB. You get a free 34 days and to try out the software and see just what it can do for you!
Calculate your Emergency Fund Goal
Most people aim to have 6 -12 months of their overall expenses saved in an emergency. So the actual dollar amount varies by person and their circumstances.
Since you are opening your emergency fund and probably starting from zero, only focus on saving up 3 months of your monthly fixed expenses for now. How do you find that dollar amount?
Multiply the number you calculated in when figuring out your monthly expenses by 3, and round up to the nearest hundred dollars. That value should be your first dollar amount goal as you begin funding your emergency fund.
For example, if I calculated that my fixed monthly expenses are $769 a month. I would multiply $769 times 3 which would give me $2,307. Next, I would round that up another $100 totaling $2,400. So my first emergency saving fund goal would be $2400.
Below is a chart detailing the same information in a more visual manner:
|Start with Fixed Monthly Expenses (FME)||$769|
|Develop 3-Month FME Total: FME x 3||$2,307|
|Round 3 – Month FME Total Up for Total 3-Month Goal||$2,400|
Note: As you reach your 3-month goal, increase your funding amount to 6 months of monthly fixed expenses, then 12 months of monthly fixed expenses. Once you reach 12 months, focus on funding the dollar amount of your variable expenses starting back with a 3-month goal.
Open a High Yield Savings Account (HYSA)
You want to put your emergency savings in a location that’s safe an accessible for well emergencies. You also want to make sure that you are earning as much interest on that money as possible.
So, think about opening an online high yield savings account. They usually offer a higher interest rate compared to regular brick and mortar banks, so you will have the opportunity to grow your money faster. Be sure to keep this new account separate from your other accounts to make it harder to tap into.
Online Banks Are Good For An HYSA
I use an online bank to house my emergency fund. It provides me with a higher interest rate than brick and mortar banks, and it is also easily accessible if I ever need to quickly transfer funds for an emergency.
There are plenty of banks for you to choose from, so of course, do your own due diligence. I cannot and am not giving you official financial advice. I am just sharing what has worked well for me. So, do your due diligence and make the best decision for yourself.
Most importantly though, Do not wait until you have the arbitrary “enough money”. Not putting the money in an account that could earn you interest puts you at a greater risk of the consequences of inflation. And no one usually wants their money to be worth less in the future than it is today.
So, open a high yield savings account today and put something in there to get yourself started, even if it’s just $5. Keep in mind that something is better than nothing – there is no shame in starting small, and it’s actually how most of us get started and grow our emergency funds. Of course, a reminder again to do your own due diligence when deciding where to place your money.
For some reason, a lot of people, especially younger adults, avoid this step because it seems overwhelming to save a lot of money quickly. Give yourself a break, if you want to save $500 in your emergency fund but only have $100 to put in it, guess what, you are still in a better position than someone who has no emergency fund set up or dollars in that account.
Being consistent with saving small amounts over time is what’s going to make you a financially successful individual. So get started!
Fund the Account and Develop a Funding Plan
Now, it’s time to actually add money to the account. Try to create a funding plan for yourself so you are adding money to it consistently. You can even set up automatic transfers to the account. Do what works best for you and your situation, just be sure to actually create and start a plan that can get you to your emergency fund goal!
If you aren’t sure how to go about creating an emergency fund savings plan, don’t worry I am about to talk about that next.
How To Create An Emergency Fund Savings Plan
Above, we discussed what an emergency fund is and how to go about setting up an account for it. Now, we are going to talk about how to create a plan to fund the account.
Look at Your Budget And Figure Out How Much Money You Can Save Monthly
This whole process is about delayed gratification. You are saving money now to give yourself peace of mind for the future. That’s all it is.
So, start off by seeing where you can cut back, switch, or consolidate in an effort to give yourself money to save.
Do you have a side hustle that nets you some extra cash? Can you switch to a more affordable cell phone plan, pause subscriptions, or start couponing? These are only a few of the ways to try and open up your funds so you can start setting some money aside.
I will point out that a budgeting software like YNAB makes finding gaps where you can save money much easier.
As you experiment and see where you can find some savings, keep the experimentation up. You don’t have to stick with the same money-saving method forever. Feel free to switch and see what works best and when.
Some money-saving tips work better depending on the season, like going to parks for entertainment. That is usually something people like to do in the summer or spring, not the winter. So keep an open mind during this step and remember any little amount saved helps.
Actually Put Your Savings Into Your HYSA
Do not overlook this step! It is integral!
I know it will be difficult to let the money go and put it into a savings account instead of spending it. It’s tough. But you just have to remember the bigger picture.
Any savings you make need to be solidified by adding those savings to your, you guessed it, savings account. Otherwise, you’ll probably end up spending that money elsewhere which is not useful to your goal of building your emergency fund.
So if you save $30 on your cell phone bill each month, start putting that $30 into your HYSA? You were able to save $45.27 on groceries this month by couponing? Move that $45.27 in savings into your emergency fund account.
If at all possible, try and automate these savings, especially on things that are predictable and more permanent like the savings that come from switching to a more affordable cell phone plan. All in all, the more you embrace the search for savings, the more fun the process can be, and the quicker you can reach your savings goals!
Keep Saving Until You Are Fully Funded
Whatever your savings goal is, do not stop chasing it until you achieve it. Even after you achieve it, re-assess and see if you need to expand your goal. The general rule of thumb is to have 3 to 6 months of your basic living expenses saved up. Even if you never need that higher amount saved up, having emergency savings is just as much about having peace of mind as it is surviving an emergency. So, better safe than sorry!
Roll With The Punches Adapt And Continue On
As you get into building up your emergency savings, you may find that it goes in a cycle – just when you get a nice balance built up, you’ll need to use it, and now you are back needing to replenish the account – but don’t give up. You are working on a new habit and it is going to take time to fully develop and hone it. Eventually, you will reach an account balance that you never imagined you’d see.
Once you get there, that’s when you must remain strong in your saving habits and avoid the temptation to take unnecessary and costly risks. The sole purpose of an emergency fund is that it is there when you need it most.
Don’t Touch The Account!
Once you get to this point, it will truly be about avoiding the temptation of dipping into the account for those non-emergency reasons. No, an impromptu summer vacation is not a real emergency. Trust me. It seems fun and awesome in the moment, but if it deters you from saving when you need to most, don’t do it.
If you know that you will have an issue not touching the account create some barriers for yourself. A lot of people open their emergency savings account at a separate bank from their regular checking and saving accounts to help deter themselves from dipping into it. Anything you can do to forget about the account except when putting money into it is worth your consideration.
With some good planning and strong practicing of delayed gratification, you can reach your emergency fund savings goal sooner than you might think. Just remember, a little here and a little there is better than none at all.
You may also need to train yourself to avoid the temptation to spend it on non-emergencies. Most people find that opening their account at a separate bank from their regular checking is most effective in avoiding temptation. Ideally, you should almost forget you have this account until a real emergency happens. Anything you can do to create an “out of sight, out of mind” philosophy will become very important to ensure the funds are there when you really need them.
So enough reading, time to take action!
Best of luck adulting!
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