• 2-Minute Article
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  • Jun 01, 2017

5 Steps for Building an Emergency Fund

Learn how to prepare for an unexpected financial emergency.

Questions this article can help you answer:
  • How do I build an emergency fund?
  • What expenses would I use an emergency fund for?
  • What is the best way to save for future medical expenses?

An emergency fund is a savings buffer that can help cover unexpected expenses like out-of-pocket medical costs, urgent home repairs, and unanticipated travel. It can also offer you peace of mind in times of unforeseen challenges, such as the loss of a job.

Unexpected Expenses

Here are five steps you can take to start saving for an emergency fund today:

Establish a Budget

Tracking your income and spending on a regular basis can help you get an accurate picture of your monthly cash flow. Check your account statements to take inventory of what money goes out and what money comes in.

Many people use credit cards to cover unexpected expenses. Maintaining a budget can help you identify opportunities to pay down any high-interest debt you may owe.

Set a Savings Goal

Before you begin to save money, it’s important to set a specific savings goal. Some experts recommend saving 6-12 months’ worth of living expenses in your emergency fund.1

Build Your Savings Gradually

Many financial experts agree that a general rule when building a savings account is to set aside 10-25% of each paycheck, if possible.2 You can start slow and gradually increase your savings contributions over time.

Build Your Financial Portfolio

Some life insurance policies offer a cash value feature that may provide an opportunity to make a tax-free withdrawal. Keep in mind that withdrawing cash value funds reduces the amount of money that would be paid out to beneficiaries when you pass away.

Annuities are a type of financial product that can provide a steady stream of guaranteed income payments. The guaranteed income of an annuity could pay for daily, weekly, or monthly expenses while other buckets of income could be used for items such as an emergency fund.

Remain Disciplined

Sticking to your savings plan is a key component of building an emergency fund. As you begin to make financial progress, it’s important to maintain the saving methods that worked best for you.

Building an emergency fund can help protect you from taking on debt to cover unforeseen costs. Once that emergency fund is established and an emergency arises, you can dip into the fund as needed. Don’t forget to replenish the funds you used as soon as possible to help reach your savings goal again.