Setting aside cash in an account as an emergency fund is a good way to protect yourself from the “what if” expenses that happen to all of us from time to time.
- What if the refrigerator stops working?
- What if I need a plumber?
- What if my car breaks down?
Of course, it’s easy to use a credit card to pay for these expenses. But if you don’t pay off the bill right away, you’ll have to pay interest. After a few months, your balance could really snowball.
Not having an emergency fund is one of the reasons many individuals borrow too much money, resort to high-cost loans, or increase credit card balances to high levels. An emergency fund gives you peace of mind, knowing you can pay for unexpected expenses.
If you look at your needs vs. wants, you probably will find some opportunities to begin saving.
Ways to Save
There are multiple ways to save money for an emergency fund. First, set a small goal and build from there. You could start with saving $400 over a specific time period. Then when you’ve reached that amount, you can gradually increase your savings goal to an amount equal to one month’s income, then three month’s income, and so on.
- Save automatically – You can direct deposit a portion of your paycheck to a savings account, so you save without thinking about it. You also can use payroll deduction for 401(k), HSA and FSA savings and expenses.
- Save your tax refund – If you’re getting money back this year, use it to pay down high interest debt or put it towards your emergency fund.