You can’t make it through life without a few curveballs being thrown your way. Whether it’s a sprained wrist, a fender-bender, or a broken window at your business, it can be frustrating – and costly – to face these unexpected challenges. That’s why it’s best to prepare for the worst, and one way to do this is with an emergency fund. In this week’s blog we’ll be covering everything from what an emergency fund is, when to use it, and how to get one started, so you’ll have a safety net in place to catch you when things don’t go according to plan.

What is an Emergency Fund?

As the name suggests, an emergency fund is a cash reserve that is used specifically for unplanned, emergency expenses. The idea is that with an emergency fund in place, you won’t need to turn to loans or credit cards to help cover these financial shocks. As a result, the fund can save you from falling into debt because of unexpected setbacks. In other words, an emergency fund is more than just money on hand – it gives you the confidence and financial security you need to overcome any potential obstacles with ease.

When Should You Use It?  

It’s up to you to define which events are emergencies and which are not. For example, an emergency could be the loss of your job, a broken-down car, repairs to your home, property damage at your business, medical expenses, etc. When life doesn’t go your way, take a second to ask yourself, “Can I survive this financially?” If the answer is no, then that is the time to dip into your emergency fund to cover any unanticipated costs. Remember, you can always work to build up your emergency fund again, so don’t be afraid to use it when the right time comes!

That being said, let’s get into 7 steps you can take to build your emergency fund:

1. Determine How Much to Save

Note that the purpose of an emergency fund is to help get you back on track after you’re hit with a curveball. With this in mind, it should be used to cover expenses for a time, not to permanently replace your income. The amount of money an emergency fund should have is different for each person’s situation, depending on their necessities and how many months’ worth of expenses they wish to cover.

To calculate the goal amount for your emergency fund, first start by adding up your total costs per month. This can include any necessary expenses such as rent or mortgage payments, recurring bills, food, transportation, and any other important monthly costs. Next, you can multiply that total by the number of months to would like your emergency fund to cover. To give you an idea, many financial experts recommend that an emergency fund cover 3-6 months’ worth of expenses. However, if you are a business owner, a sole breadwinner, or someone with a variable outcome, you may want to consider saving 9 months to a year’s worth of expenses for an extra cushion.

2. Start Small

Of course, saving enough money to cover 6 or 9 months’ worth of expenses can take a long time, and you may not have the flexibility to save such a large amount right away. Every person is different and if this seems like a daunting task, know that it’s okay to start small. Maybe you’d prefer to create a starter emergency fund with $500 and increase it from there. Just be sure that you aren’t sacrificing more than you can, otherwise you might get burned out. What matters most is not how much you choose to save in an emergency fund, but that you start saving and develop this habit.

3. Figure Out Where to Save

When starting your emergency fund, be sure to separate it into a savings account rather than keep it in the same account as your usual funds. This way, you’ll be able to let your money grow without the temptation to use it early. On the other hand, you also want to be sure that you keep your funds in an account that you can easily access. If a true emergency happens and you come across unexpected costs, you don’t want to wait to access your funds.

There are a number of savings account options you can choose from to house your emergency fund. In particular, most financial experts recommend using a basic savings account or money market account. Both of these account types come with different features and benefits, so be sure to do your research and speak with a financial advisor before choosing the right one for your situation.

4. Automate Savings

Once you decide on how much, how often, and where you want to contribute, you can set up automatic deposits to your emergency fund. With automatic deposits, you can be sure that you remain consistent with your savings while building momentum. You can even look into split direct deposits, where a specified portion of each check you earn will automatically go to your savings while the rest is transferred to your everyday checking account. Just remember to set up automatic notifications as well, so you can check in on your savings each month and stay on top of your balance.

5. Find Ways to Increase Your Savings

Starting small is a great way to kickstart your emergency fund. However, to continue building momentum you’ll also want to increase your savings contributions over time. One of the first ways you can increase your savings is by reviewing your budget. Budgeting will help you understand how much money is coming in each month, and therefore how much you can allocate to different needs. If you review your budget and notice that there are some areas where you can cut down on spending, why not move some of that freed up money to your emergency fund?

Additionally, not all of life’s surprises are bad ones. Sometimes you might find yourself coming into some unpredicted income! Whether it be a larger-than-expected tax refund, a holiday bonus, a cash gift for your birthday, or money won from a contest, these are all opportunities to boost your emergency savings. So before you’re tempted to spend that bonus check on a getaway, consider saving all of that money or at least a portion of it in your emergency fund.

7. Keep Saving

If the day comes where you need to drain your emergency fund, don’t stop adding to it! Life will always be unpredictable, and you never know when the next obstacle might pop up. The more you can add to an emergency fund, the better prepared you’ll be to cover expenses for months at a time if it becomes necessary. Even if you don’t experience another emergency for years, it is still smart to continue building an emergency fund as a security measure. Just knowing that you have funds to fall back on in the event that something goes wrong can make a big difference in relieving financial stress and making you more confident with your money management skills!