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Having an emergency fund is vital if you want to take control of your finances. But how do you set aside several months’ worth of expenses if you’re paying off existing debt or struggling to make ends meet? The good news is that you can save for a rainy day without messing up your debt payoff plans. How?
Set up a Starter Emergency Fund.
That’ s right. Build a starter emergency fund for now and once you’re in a better spot financially, you can finish saving.
How Much Money Should Be in Your Starter Emergency Fund?
This is a great question. It depends on your situation, but a good rule of thumb is to quickly save up $1,000 in your starter emergency fund. Will it cover every emergency? Of course not. But it’s better than nothing.
Where many people get tripped up is never going back to build up the rest of their emergency fund. Having a starter emergency fund helps you stay on track with your money goals when life happens.
Why You Need an Emergency Fund
We all know that it’s not a matter of “if” an emergency will come, but “when” it will come. Just this year, we’ve had a handful of events pop up that I’d consider emergencies like:
- Replace our water heater
- A few trips to the ER
- Replace brakes and rotors on my car
Maybe you’ve experienced similar situations (or worse) this year. Unexpected expenses can wreck your finances, derailing your savings goals long term.
Having an emergency fund is like having insurance for your finances.
How To Set Up a Starter Emergency Fund
Creating a starter emergency fund is easy to do. If I can figure it out, so can you. Here are the steps you’ll need to take to get going with your starter emergency fund.
1. Open a Separate Bank Account for your Emergency Fund
Emergency funds need to be accessible. But not too accessible. It’s imperative to set up your emergency fund in a separate bank account than your everyday bank accounts.
Why is that?
It’s too easy for us to convince ourselves that something is an emergency when it really isn’t. If your emergency fund is kept with your other money, it’s too tempting to use it anytime there’s a small expense.
Because of this, we recommend keeping your emergency fund online in a high yield savings account. Online banks don’t have the overhead costs seen at your local brick-and-mortar bank, so they’re able to pass the savings on to customers through higher interest rates. Your local bank’s saving account probably earns 0.06% APY, while many high-yield savings accounts offer rates of 1.00% APY or higher.
The goal of an emergency fund isn’t necessarily to earn interest, but hey…why not make a little money while you save!
Here’s our picks for the best high-yield savings accounts
Our Top Choice: CIT Bank
This high-yield savings account earns 4.65% APY That's over 11x the national average!
Savings Connect requires a $100 minimum opening deposit. No monthly fees. FDIC insured.
Other great options:
- Discover Online Savings Account
- Marcus by Goldman Sachs Online Savings Account
- Ally Bank Online Savings Account
- Capital One 360 Performance Savings
Online savings accounts are easy to set up and use. Just apply for an account and then fund it by electronic transfer from an existing bank account.
2. Start Setting Aside Money for Your Starter Emergency Fund
Funding your starter emergency fund isn’t always easy, but there are ways to find extra cash if you are serious about being prepared for life’s emergencies. Here are a few ways to get some cash for your starter emergency fund.
Cut spending: Take the next few months to cut back on your discretionary spending. You can do this by tracking your expenses to find any holes in your budget. Budgeting apps are great for tracking expenses.
Start a side hustle: If you’re having trouble saving money with your existing income, try adding a side hustle, even if it’s just for a season. Sometimes a side hustle or part-time job is what you need to generate extra income for an emergency fund.
Check out this awesome list of 130+ Side Hustle Ideas To Start Today from my friend, Lance, from MoneyManifesto.com.
Sell your stuff: Everyone has stuff lying around the house they no longer use or need. There are tons of ways to sell your stuff for extra cash. Here’s a few of our favorite sites for selling online:
- Facebook Marketplace
Use your Tax Refund: If you typically receive a tax refund check each year, why not use all or at least a portion of it to build your starter emergency fund.
3. Take Care of Business and Then Fully Fund Your Emergency Account
Once you’ve built your starter emergency fund, you can take care of paying off debt and any other financial obligations.
But don’t forget to get back to building a complete emergency fund. Most experts recommend keeping at least six months’ worth of expenses in your emergency fund. If you can save 12 months’ expenses…even better!
Emergencies are a part of life. Having an emergency fund can help relieve a lot of your stress, whether it’s a minor expense or something more serious, like a medical emergency or losing your job. An emergency fund isn’t the solution for everything, but it’s a good start.
What are you doing to contribute to your emergency fund? Let us know in the comments below!
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Kevin Payne is the budgeting and family travel enthusiast behind FamilyMoneyAdventure.com. He’s also the host of the Family Money Adventure Show podcast, where he helps families learn to manage their money better so they can afford to do the things they love.
Kevin is a freelance writer specializing in personal finance and travel. He is a regular contributor to USA Today, Forbes Advisor, Bankrate, Fox Business, Credible, and CreditCards.com.