I’m going to take you through everything you need to know about a starter emergency fund, including why you need one, how to begin saving, where you should keep your emergency funds, and situations that might warrant spending it. Let’s get started!
What Is a ‘Starter Emergency Fund’?
Simply put, a starter emergency fund is a stash of cash that you can set aside in a bank (or in a hole in your backyard) and use when dealing with unplanned expenses, such as:
- Car repairs
- Urgent Home Improvements
- Medical Expenses
Everyone must get started somewhere, and while some experts suggest you stash away three to six months’ worth of living expenses as part of your emergency fund, doing so is a lot easier said than done. The difference between a starter and a full-blown emergency fund is that you aim to put as much money as you possibly can towards your starter emergency fund in as little time possible. The goal here is to get the ball rolling because something is better than nothing.
Why You Need a Starter Emergency Fund
Imagine this: You lose your job, your car breaks down, and when you get home, you realize your roof started leaking. An extreme example, but bear with me.
You’re living paycheck to paycheck, and you don’t have much money in your savings account.
How are you going to fix your car? Or your roof? I guess you could take out a loan or perhaps use one of those high-interest credit cards.
The problem? You’ll end up paying a lot of money in interest, and you don’t have any income because you’re currently unemployed, which is why you need a starter emergency fund.
By stashing away a small percentage of your income each month, you gradually build up a financial buffer that can keep you afloat when you need it most.
With enough time and effort, you’ll find that dealing with all those curveballs that life seems to throw our way won’t seem as daunting or intimidating as before.
How Much Money Should I Allocate Towards My Emergency Fund?
Here’s the thing, it depends. You want to be in a situation where you could quickly pay for an unexpected expense, like a car repair or a leaky roof. Still, it’s equally important to have enough of a financial buffer to cover a few months of living expenses if needed.
So, if you end up losing your job and spending three months looking for a new one, you’ll want to have more than the cost of a new fridge in your emergency fund. For example, if you spend $3,000 per month (the average American household spends $5,102), your ideal emergency fund would be between $9,000 and $18,000.
However, with our starter emergency fund, the goal is to begin saving as much as you possibly can without setting clear targets based on living expenses initially.
On the other hand, don’t feel discouraged if you feel like you can’t afford to allocate a considerable chunk of your paycheck to building out an emergency fund as soon as possible. Even starting with something as little as $1 – $3 a day could help build a substantial fund in under a year.
Benefits of Having a Starter Emergency Fund
1. Cover Unplanned Expenses Without Stressing About It
According to a Bankrate report, the average unexpected expense was a whopping $3,500. How many Americans do you think will be able to cover that? Less than 40%. To add a cherry on the cake, the Federal Reserve estimates that around 30% of Americans do not have enough money in savings to cover an unplanned expense of as little as $400. Many people are only one emergency away from financial catastrophe and emphasize the benefits of having an emergency fund.
2. You Don’t Need as Much As You Think
But it’s not all bad news, and it doesn’t mean that you need thousands of dollars in a fund for the strategy to be effective. Based on research from the Urban Institute, people with savings of as little as $250 to $749 are “less likely to be evicted, miss a housing or utility payment, or receive public benefits after a job loss, health issue, or large income drop.”
3. Can Help Keep Your Stress Levels Down
Having an emergency fund can also help you keep your stress levels in check. Enrich found that on a stress rating from 1 to 5, employees without emergency funds were at a 3.52 on average. In contrast, those with emergency funds were at a stress rating of 2.69. Being prepared for financial emergencies gives you the confidence you need to tackle the curveballs that life throws your way.
4. Helps You Control Your Spending
According to a FINRA Investor Education Foundation’s Financial Capability report in the United States 2016 report, 38% of Americans spend about equal to their income, while 18% spend more than their income. Those numbers are worrying, but one of the benefits of having an emergency fund is that it helps keep you from spending on a whim. You can use autopay or salary deductions to automatically transfer a portion of your paycheck into an account used to stash away cash. You’ll know exactly how much you have, how much you need to save, and by keeping it out of immediate reach, you are less inclined to spend it on things you don’t need.
Where Do I Keep My ‘Starter Emergency Fund’ Money?
Building an emergency fund takes time, so you want a solution that could help you earn interest while keeping your money safe and within reach if needed. The best way to do that is with a regular savings account with a high interest rate and easy access or a federally insured high-yield savings account.
When is a Good Time to Use Starter Emergency Funds?
A lot of expenses can be perceived as emergencies, especially if we want them! But there’s a difference between the things we want and the things we need. If the expense is genuinely unexpected or unplanned and necessary or urgent, it might be worth dipping into the emergency fund to cover it. Try your best to use as little as possible or none at all, but there are situations where that won’t be possible, and don’t feel bad if you have to empty the safe and hit the ‘reset button.
6 Step Process to Starting Your Emergency Fund
1. Calculate your saving target
Your target could be saving three to six months of your living expenses or just aim to have $400 in your account by the end of the year. You need to decide how much or how little you feel comfortable allocating, but either way, any amount is a good start!
2. Determine your monthly savings goal
First, figure out how much money you’d be able to reasonably set aside after covering all your most essential living expenses. Once you’ve settled on a number, make it your goal to save that amount every single month moving forward. By getting into the habit of saving regularly, your target of building an emergency fund suddenly becomes a lot less daunting.
3. Use Salary Deductions to Simplify Your Savings Goal
You can use automatic salary deductions to help you set aside money for your monthly savings goal. Please speak with your employer or reach out to Stately Credit to find out more about how we could help you set up payroll deductions for your emergency fund, free of charge. You could also use something like Autopay to help automate payments to your new account.
4. Save The Difference
There are many apps out there that can round up all your purchases to the nearest dollar and transfer the difference to a savings account or an investment account that automatically purchases stocks for you. For example, if you buy a coffee for $4.50, the app will round up the purchase to $5.00 and send $0.50 to your savings or investment account. Simple!
5. Bank the Tax Refunds
Stashing away your tax refunds into your emergency fund is an excellent way of boosting your progress! Don’t miss out on the opportunity to do so once a year.
6. Make Adjustments If Needed
Keep a close eye on your account, and make adjustments to your savings targets if needed. Rather than storing all your cash in an emergency fund, you could consider starting an investment account instead.
Starting an emergency fund can be a lot of work, but it’s certainly worth the effort. Many experts say that you need anywhere from three to six months’ worth of living expenses in savings, but many people feel intimidated by how long it could take them to reach that goal, given their current situations. We understand the profound impact that a lack of savings can have on your mental and financial well-being. This is why the whole team at Stately Credit is committed to providing you with affordable salary-linked loans that can help you save money and build credit while protecting you from the turmoil of dealing with unexpected expenses.