4 Steps to Start an Emergency Fund From Zero

4 Steps to Start an Emergency Fund From Zero: Unexpected emergencies happen to everyone and it’s a fact of life. It could be a blown transmission on the car, phone screen cracks, or even worse, the loss of a job. It can make all the difference based on how prepared you are for these types situations. According to Bankrate.com, 66 million Americans have no emergency savings to fall back on. By starting an emergency fund, you’re giving yourself the security of knowing you can cover unexpected expenses should the need arise and eliminate/lessen the stress when it occurs. 4 Steps to Start an Emergency Fund 4 Steps to Start an Emergency Fund

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4 Steps to Start an Emergency Fund From Zero

How To Start an Emergency Fund 4 Steps to Start an Emergency Fund

Prior to starting an emergency fund (otherwise known as a rainy day fund), you’ll need to level set on how, and when, this account will be used. Think of your emergency fund as money that’s set aside in a separate account to be used for emergencies. Managing this account requires discipline—it needs to be used for true emergencies (not included here: an upgrade to the latest phone, wallet, purse release). 4 Steps to Start an Emergency Fund

It takes time to build an emergency fund, but don’t let the process feel stressful or overwhelming. The secret is to have a plan. Here are four steps to start an emergency fund:

1. Start With Baby Steps 4 Steps to Start an Emergency Fund
   • “Every financial expert sets some number as a benchmark for emergency funds—anywhere from three to six to 12 months of expenses,” says Kerri Moriarty, head of company development for Cinch Financial, a Boston-based startup building financial software. “For most people that’s just downright aspirational,” especially, she adds, when paying student loans, a credit card balance and rent or a mortgage.
   • Saving six months or more worth of expenses can feel intimidating or discouraging. That’s why it’s so important when figuring out how to start an emergency fund to begin with small goals and gradually work up to your long-term objective.
     • For example, when I started working, I stuck to my 75/25 rule. Minus expenses such as bills, gas, rent, etc, the money you have left over, put away 75% of the left over money in a savings account, and the leftover 25%, you can use for your own leisure. It’ll be hard, but discipline is the key especially with your savings. Once you’ve developed the habit, you can change the ratio to 80/20, 90/10, 95/5, or even 100/0. If you’re thinking about opening a savings account, I personally use and recommend opening a new Discover Bank Online Savings Account to earn interest on your funds. 4 Steps to Start an Emergency Fund
     • If the ratio method isn’t for you, you can also set a limit/or minimum balance that you would like to keep in your account at all times and gradually add to it. For example, I used to set a minimum balance goal of $2,000 in my account at all times. That fund would be only for emergencies and gradually I raised the minimum balance (add $100 per month, then $200 per month, etc). With either or method, you’ll soon reach a safety cushion of 3 to 6 to even 12+ months in emergency funds.
   • “Reduce your frustration and risk of de-motivation by setting milestone goals to work toward,” Moriarty says. “For example, building up $500 in emergency funds, then $1,000, then $2,500 and so on until you watch yourself tracking to one month or three months or six months covered.” 4 Steps to Start an Emergency Fund
2. Choose A Place To Keep Your Emergency Fund
   • When you start an emergency fund the purpose is to have quick, easy access to your cash. To accomplish this, consider keeping at least the first three months’ worth of expenses in a high interest savings account so that you can access it at any time. After that, you could put any additional funds into low risk, high liquidity vehicles like a money market account or a certificate of deposit (CD). When considering how to start an emergency fund, think twice before investing in securities, since it will likely take days to unwind any positions to receive the money. Consider a Discover Bank CD or a Discover Bank MMA. 4 Steps to Start an Emergency Fund
   • “Not only should you keep emergency funds in a separate account from your regular checking and savings, but it’s even better to keep them at a different bank entirely,” Moriarty says. “Keeping them at a separate bank reduces the temptation to draw from them when you’re checking the balance of your other accounts. Out of sight, out of mind—until you really need them.” 4 Steps to Start an Emergency Fund
3. Make Contributions Automatic
   • Very similar to a retirement fund, it’s important to pay into your emergency fund first. When you start an emergency fund, set aside a certain percentage of your take-home pay each month and put it straight into your account. You can set up either an automatic deposit on payday or a separate direct deposit with your employer as part of the steps to start an emergency fund.
   • But don’t stop there. Once you’ve started an emergency fund, find other creative ways to build your account even faster. 4 Steps to Start an Emergency Fund
   • “When you start an emergency fund it can be challenging, but every few dollars helps,” says Brooke Petersen, investment consultant at Conrad Siegel, an investment advisory firm in Harrisburg, Pennsylvania. “Fund it with pay from extra working hours, a tax refund or part of a raise. Alternatively, bring your lunch to work a few days a week, or brew your morning cup of coffee at home.”
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4. Continue Building When Needed
   • Finally, it’s important to remember that just because you might have reached your long-term goal to start an emergency fund, you shouldn’t stop there. Your circumstances could change through marriage or the birth of a child, for example, and your monthly expenses might increase as a result. When that happens you need to account for it. The six months’ worth of expenses you originally saved may no longer cover you.
   • Additionally, if you need to tap into this account at any point, then you will need to begin the process to replenish the amount you took out.

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Author’s Verdict

An emergency fund can save you financially. When you start an emergency fund think of it as a type of insurance policy for you and your family. You have health insurance in case you get sick, car insurance so that you’re covered in an accident and an emergency fund if something unplanned or unexpected happens. By learning how to start an emergency fund now you can avoid serious financial problems later. Take the steps to start an emergency fund one by one, and you’ll have peace-of-mind before you know it. Hopefully this 4 Steps to Start an Emergency Fund From Zero post helped you answer those questions! Let us know if it did in the comment section below or help add onto our list! Let us know about your thoughts and experience with Discover Bank Online in the comment section below! If you’re interested in more info regarding Discover Bank Online offers, check out our full listing of Discover Bank Online Bank Deals, Offers, Bonuses, and Promotions. Be sure to check back on BankDealGuy for more bank deals! How Do I Dispute A Transaction FAQs 

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