Anyone could find themselves in a financial emergency at some point in their life. Whether it’s an unexpected medical bill or an emergency home repair, having a financial cushion in place will help you avoid going into debt to access capital in a pinch. Establishing an emergency fund is an essential aspect of personal finance, and budgeting is one of the best ways to save money for an emergency fund.
Step 1: Calculate Your Emergency Fund Goal
The first step to creating an emergency fund through budgeting is to determine how much you need to save. Generally, financial experts recommend having three to six months’ worth of living expenses saved up in an emergency fund. To do this, you’ll need to calculate exactly how much you spend each month on essential expenses, such as housing, utilities, food, and transportation. If you have any fixed expenses like car payments or student loans, make sure to include them as well. Add up all of your essential expenses and multiply the total by three for a basic emergency fund goal. That number is the total amount you need to save for emergencies.
Step 2: Create a Budget
Now that you know how much you need to save, you can start creating a budget that will help you reach your emergency fund goal. Start by listing all of your sources of income – including any side hustles or freelance work. Then, make a list of your essential living expenses, such as rent, utilities, groceries, and transportation. If you have any extraneous expenses, like subscription services or dining out, include those too. You can also use a budgeting app to make tracking your expenses easier.
Determine how much you can afford to set aside each month, then subtract that amount from your total income to calculate how much you have leftover for other expenses. To get the most out of budgeting, make sure to review your budget regularly and adjust it as necessary if your expenses or income change.
Step 3: Find Ways to Cut Expenses
Once you’ve created your budget, the next step is to find ways to cut your expenses and free up additional money that you can use to save for your emergency fund. Start by re-evaluating your fixed expenses to see if you can lower them. Can you refinance your student loans or car loan to get a better interest rate or switch to a cheaper cell phone plan? Look for any other recurring expenses you can eliminate or reduce, such as switching to a cheaper cable provider or cutting back on takeout meals.
You can also trim your variable expenses, such as groceries and entertainment expenses. Try shopping from a meal plan, carpooling instead of driving your own car, and using coupons whenever possible. You may also want to look into an automated savings service like Acorns, which rounds up your purchases and uses the extra money to save the rest of your extra cash.
Step 4: Create an Emergency Fund
Now that you’ve determined how much you need to save and created a budget to help you reach that goal, it’s time to set up an emergency fund. Open up a savings account specifically for your emergency fund and set up an automatic transfer from your checking account each month. Make the transfer date the day you get paid, and be sure to make the deposit right after getting your paycheck – this will help you avoid overspending.
You should also open an interest-bearing savings account. This is a great way to earn more interest on your emergency fund and grow your savings faster. Finally, if you have any other savings accounts that you’ve been neglecting, this is a good time to move the money over to your emergency fund.
Step 5: Track Your Progress
Once you’ve set up an automatic transfer from your checking to your savings, it’s important to check in on your progress every few months. Make sure you’re sticking to your budget and see if there’s any areas where you can trim expenses to free up more money for your emergency fund.
It can also be helpful to set milestones for your emergency fund savings. For example, if you have a goal of saving $10,000, see if you can break it down into smaller increments. For example, you could aim to save $2,500 in the first four months, $3,000 in the next four months, and so on. Having these smaller goals will help you stay motivated and incentivize you to keep saving until you reach your ultimate goal.
Creating an emergency fund might seem like a daunting task, but with the right budget and a smart plan, you can achieve your goal in no time. Budgeting may take some effort, but it’s the best way to get your finances in order – and having an emergency fund will give you peace of mind knowing that you have a safety net in place.