How to Save for an Emergency

*** The following article is proudly contributed by our friends at AAFMAA. Veteran Saves does not endorse organizations or products. We encourage you to research and cross-reference information before doing business with any organization. Remember, “an informed saver is an empowered saver, and an empowered saver can make the best decision for themselves.”

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One thing all Veterans have in common is knowing how to be prepared for unexpected events. Sometimes, being prepared means having enough cash on hand to get you through any adverse situation without resorting to loans or incurring credit card debt — whether it be an unexpected (and expensive) car repair or medical bills or even a natural disaster. Having an emergency fund is essential to your preparedness for facing life’s financial surprises head-on. 

The basics: What is an emergency fund? 

An emergency fund is a store of cash kept in a dedicated bank account that can be easily accessed in case you need it. Typically, an emergency fund consists of two-to-six months of your personal living expenses. Ensuring you have sufficient funds on hand to help see you through a tough financial situation will help you maintain your equilibrium so you can stay focused on resolving the problem and swiftly moving on from it. 

The details: How to create an emergency fund. 

You can start creating your emergency fund in four easy steps: 

1. Determine how much money you need. To assess how much money to include in your fund, add up a typical month’s expenses: mortgage/rent, food, utilities, transportation costs, insurance and any other recurring costs. Once you know your monthly expense total, double it. That will give you your minimum emergency fund amount.
2. Establish a dedicated bank account. You want easy access to your money, so it’s best to keep it in an interest-bearing savings, money market or checking account. Your emergency fund should be liquid, and not tied up in a retirement fund or CD. Look online to find options for opening a high-interest savings account, or check Bankrate.com to find other savings options. 
3. Set a monthly savings goal. At a minimum, your emergency fund should cover two months of your personal living expenses. Let’s say this means $6,000. To save that much in a year, you must save $500 a month. Look over your budget to determine where you can make any spending cuts, if necessary, to help you achieve that savings goal. And, once you reach it, consider ways to continue adding to the fund to ensure you’ll be covered for an appropriate duration in the future.
4. Start saving. One of the most effective ways to save is to create a system for making consistent contributions, such as setting up automatic recurring transfers from your checking account to your dedicated emergency account. Sometimes you can have a portion of your paycheck deposited directly to a savings account. Whichever way you do it, it takes time and commitment to reach your savings goal, so be sure to allow yourself that time. It’s for your own good, after all.

The outcome: Acquiring your savings may be the most difficult part. 

You may have to tighten your belt while you are creating your emergency fund. You’ll have to look at your budget and figure out your wants versus your needs — and determine what you can cut out, such as streaming subscriptions, monthly memberships, dining out, cable television. It may be painful at first to make such cutbacks, but once you reach your savings goal for your emergency fund, you can reassess the cutbacks you’re making knowing you have a cushion of cash already stored away for the future. 

The alternative: Other ways to cut back on spending. 

Additional ways you can save (and, therefore, spend less) every day is by negotiating better rates with your car insurance or cell phone providers. You may also explore the discounts you are eligible for as a Veteran or a member of an association (AAARP, for example).  

If you are looking for expert insights in how to build an emergency fund as part of your financial plan and how AAFMAA can help, visit aafmaa.com.