Starting Your Emergency Savings Fund

At points in each of our lives, unexpected, uncontrollable and urgent events occur. While you cannot always control the outcome, you may be able to safeguard yourself by having an emergency savings fund in place.

An emergency fund is a safety net that can help cover unexpected expenses without breaking your budget or taking on debt. Emergency savings accounts are meant to be kept separate from other long-term savings accounts and only used in case of an unforeseen situation. Consider these tips to help you build your emergency savings fund.
 

Budgeting for an Emergency Fund

More than half of the adult population in the U.S. does not have enough in savings to cover a $1,000 emergency from savings, according to research recently conducted by Bankrate. Setting aside cash for unexpected events is important for long-term stability and can also give you some peace of mind.

It is recommended to save at least three to six months of living expenses in an emergency savings fund. So, the amount you need to save depends on your lifestyle, committed expenses, household size and income.

How much emergency cash do I need?

Here’s a simple way to figure out how much emergency money you should budget.

Step 1: Figure out the total necessary expenses you pay each month

These expenses include everything from your rent or a mortgage payment, utilities, car payments, gas, groceries, phone bill and any other necessary payments made on a monthly basis. For this example, we’re going to assume $2,000 of monthly expenses.

Step 2: Pick the number of months for the emergency fund to cover

We’ll use three months for this exercise.

Step 3: Choose how long it will take to fund an emergency savings account

This number is based on the amount of money you intend to save per month. For this example, let’s say that we want to reach our emergency money goal in three years.

Step 4: Do the math

Multiply monthly expenses by the number of months the emergency fund will cover. 
$2,000 * 3 = $6,000 emergency cash needed

Multiply the number of years you’ll save to reach your emergency savings goal by 12, to figure out the number of months you’ll need to fund the emergency account.
3 * 12 = 36 months to fund savings goal

Divide the emergency savings goal amount by the number of months needed to fund your savings goals to determine your monthly contribution.
$6,000 / 36 = $167 monthly contribution

In this example, you need to save $167 every month for three years to have $6,000 in the emergency savings account. This doesn’t account for any interest accrued from your savings account.

Where to Save Your Emergency Fund

Now that you know how much money you need to save to build up your emergency savings, you’ll want to decide where to save it. It’s smart to start a separate emergency account to avoid the temptation of dipping into it. Here are a few safe options for storing emergency money.

• Basic Savings Account:  Savings accounts can help you grow your money while keeping funds easily accessible. Consider a statement savings or passbook account when saving for the near future. These accounts typically have few or no minimum balance requirements but annual percentage yields (APYs) may be lower when compared to other types of savings accounts.
• Money Fund Account: This type of savings account is sometimes tiered, meaning the higher your balance the bigger the reward. Money fund accounts tend to offer similar APYs as money market accounts, but tend to be more flexible when it comes to withdrawing your cash.
• Certificates of Deposit: Another option is to move some of your emergency savings into a certificate of deposit (CD) as a way to earn interest on money you’ve already saved and can afford not to access for a while. You’ll get a guaranteed rate of return based on your initial deposit and term, and your money is FDIC-insured (up to $250,000 per depositor). You may also consider laddering CDs so they mature at different dates, giving you access to your money at different times.

Emergency Savings Strategies

Depending on your situation, it may be difficult to set aside money into an emergency savings account. Here are a few strategies to help you save more for a rainy day.

1. Make savings automatic: Use direct deposit to automatically set aside a portion of your paycheck into your emergency account each month.
2. Evaluate and reduce monthly expenses: Look at non-essential costs that can be substituted with less expensive alternatives or cut them out completely. Take a look at subscriptions that may be non-essential or try cooking more at home and eating at restaurants less. Your emergency savings account will thank you later.
3. Sell used items: If you haven’t used something for six months, why not think about selling it? There are a ton of free apps and websites now that help you sell unwanted items for cash. You could also have a good old-fashioned yard sale. Set aside the money you make into your emergency account. 
4. Get a side hustle: Have a talent that you could make money from, or have some extra time? Find ways to make more money by getting a second job or side hustle. 
5. Re-calculate your budget each year: Expenses and circumstances are always changing, so make it an annual task to ensure you’re saving the right amount. Our savings calculator can help you determine how long it will take to reach your savings goals as your budget changes.

A fully funded emergency savings account provides you with reassurance during challenging times. It also helps you avoid pursuing high-interest loans (like payday loans) or racking up credit card debt. This approach will give you peace of mind during the times you need it the most.

If you're ready to start an emergency savings account, Middlesex Savings Bank is here to help. Our team is eager to understand your needs and guide you in the right direction. To get started, contact us or stop by a local branch  to speak with an experienced team member.