Being financially prepared is a very important step to take on the path of financial freedom and independence. There is always that question in the back of our heads that asks, “what happens when…?” Being able to answer that question provides peace of mind and helps you prepare for an emergency.
But where should you start? I suggest starting your emergency fund with working up to $1000 in your Emergency Savings account. Here is a 7-step guide on exactly how to do this:
How to Build a $1000 Emergency Fund
Step One: Get Your Mindset in the Right Place
There is a famous quote by Henry Ford that reads: “Whether you think you can or whether you think you can’t, you’re right.” This quote definitely rings true when it comes to finances. Starting to put away money when your funds are already tight as it is can be a scary thought for some.
But don’t worry! These doubts about having the funds to start saving is normal! On top of that, there’s an easy way to quiet those thoughts.
All you need to do is replace the “can’t-s” with “how’s.” For instance, take the statement, “I can’t do this, I don’t have enough money coming in right now to do this” and change it to “I can do this. How? By negotiating a raise with my boss, by working an extra hour a day, three days per week, by getting a part-time job, by selling some things around my house that I don’t use anymore.” Sit down with a pen and paper and find your “How.”
Step Two: Get that Savings Account Opened
Next up, let’s figure out where you are going to put your Emergency Fund.
I highly recommend going to a credit union or a local bank that you trust and setting up a savings account with them. If you already have a debit account with a bank, check out their options for opening a savings account.
If you do not want to use the same banking that you use your debit account with, you can open up a separate savings account with another bank. Just be sure to make sure you get any maintenance fees waived – usually by having a minimum amount in the account or setting up a direct deposit.
Step Three: Get an Automatic Monthly Transfer Set Up
Now that you have your savings account, it’s important to set up an automatic monthly transfer from your checking account to your new savings account.
We all can start with the best intentions, but consistently putting money away into an emergency savings account manually can be difficult.
Automatic deposits give you the gift of consistency. You always know how much you are putting away per month, and can budget accordingly.
Step Four: Decide How Quickly You Want to Build Up Your Emergency Fund
Here is the scary part for a lot of people: deciding exactly how much money to directly deposit into your savings account every month. But look at these breakdowns for putting away $1000 over time:
• $1,000 in 3 months comes to $334 per month, or $83.50 per week.
• $1,000 in 4 month comes to $250 per month, or $62.50 per week.
• $1,000 in 6 months comes to $167 per month, or $41.75 per week.
Can you budget to find a way to put aside $167 per month for six months? I’m sure you can!
Even if $167 seems not doable right now, no matter how slowly you build your emergency fund, you’re doing way better than those who haven’t started building it yet. It is totally doable.
“Whether you think you can or whether you think you can’t, you’re right.” Henry Ford
Step Five: Decide What an Emergency is and Write it Down
While the scariest part can be deciding how much money to deposit into the emergency fund every month, the hardest part of having an emergency fund is only using it for emergencies.
You have the full power to decide what exactly an emergency is, and what an emergency isn’t, for this fund. So, what constitutes as an emergency?
It’s a good idea to take 10-15 minutes to sit down and write out exactly what instances you can use this emergency fund for. Be specific, and keep this list on-hand somewhere safe for when you think you have an emergency and need to use this fund.
PS: Unfortunately, those new shoes on sale are probably not going to count as an emergency.
Step Six: Adjust to the Financial Deficit
This part is also difficult at first, but gets a lot easier after the first couple of months saving.
But for the first month or so, work on tracking your income streams and expenditures. See if there is anything you are paying for that you aren’t using or don’t want anymore (I’m looking at you, Hulu Plus subscription).
If there isn’t anything that you can give up right now, consider selling things in your house that you aren’t using anymore, or help others in their neighborhood with some one-off tasks for the money (like dog walking, pet sitting, car washing, or babysitting).
You will get used to this adjustment in no time, keep at it! You’ve got this!
Step Seven: Hit That $1000 Goal and Beyond
You did it! You set goals, got a plan in place, followed that plan, and now you have $1,000 set aside in case of emergencies. Go you! That’s an amazing accomplishment!
But don’t stop here. Personal finance expert Suze Orman recommends saving up to replace 8 months of income from work.
Keep going. Why stop now that you have the ball rolling?