Establishing an emergency fund offers many advantages. Most notably, having one allows you to avoid high-interest debt options such as credit cards or personal loans in times of emergencies.
Peace of mind comes in many forms. Financial planning helps alleviate stress when unexpected expenses or challenges arise, and provides protection from common worst-case financial scenarios like losing your job.
1. Pay Off Debts
An emergency fund can provide invaluable protection in times of trouble. But how can you create one?
When saving for retirement, aim to set aside three to six months’ living expenses in an account that’s easy for you to access while offering some return in interest. A high yield savings or money market account is the ideal place for this money, offering both quick access and return in interest.
Building an emergency fund can help protect you against incurring debt in the event of unexpected expenses, like job loss or home repair expenses. While creating one might seem counterintuitive while paying off debt, building one is an essential step toward becoming financially independent and becoming debt free faster. To achieve this goal, set a savings goal and stick to your plan; saving more means faster debt reduction! Plus get expert tips, news, and advice by subscribing to CNBC Select newsletter – sign up here now.
2. Save Money
One of the best ways to build an emergency fund is by saving money. Start by identifying how much of each paycheck can afford to put away and setting up automatic deposit or transfer. Also look for opportunities to cut expenses; perhaps cancelling streaming services you don’t use often could free up more cash.
Hold onto this emergency fund separately from other checking and spending accounts so it will be harder for you to spend it at will.
Emergency funds can help protect you against costly mistakes like going deeper into debt or missing investment opportunities due to unexpected bills or challenges, making a sound financial plan essential – particularly if living paycheck to paycheck, struggling with credit card debt, or have long-term goals that could be derailed by emergencies. Experts suggest setting aside enough money for three to six months of expenses as an emergency fund savings goal.
3. Set a Goal
Experts advise saving enough to cover three to six months of expenses, depending on your income. Start with a budget to determine how much you can set aside each month, if this doesn’t add up, trim expenses – cutting unnecessary subscriptions or purchases on Amazon that don’t add value can free up funds that you can put towards emergency savings goals.
Keep this in mind when creating an emergency fund: the goal is to prepare for unanticipated financial events like job loss, car repairs, home or property damage, unexpected medical bills and any other unexpected life surprises that might pop up unexpectedly. Sure it costs money up front to create this cushion of safety – but the peace of mind it provides can make the investment worth your while – plus it prevents you from turning to credit cards in times of need, leading to additional debt and stress levels. Tip: Keep emergency savings separate from checking accounts to avoid temptation! Tip: Keep these savings out of sight to help protect against unplanned financial events! Tip 2 –
4. Automate Your Savings
Emergency savings should be set aside as soon as possible, regardless of your personal circumstances. Most experts advise setting aside at least three to six months’ expenses as emergency savings. To make reaching this savings goal easier, open an emergency-only savings account – this way your money won’t tempt you away from its intended use! Or consider opening a money market account that automatically transfers funds into it each time your paycheque arrives.
Life can be unpredictable, and an emergency fund can help prepare for whatever comes your way. But building one may seem impossible when living paycheck-to-paycheck; CNBC Select provides all the resources and advice to get your emergency savings underway – starting by determining how much can be saved each pay period and setting up automatic transfers.