THE BLOG

4 Tips For Building an Emergency Fund

02/04/2015 09:42 pm ET | Updated Apr 06, 2015

By Jonathan Roisman, NextAdvisor.com

Many Americans aren't saving money, but it's not because they don't want to. That's according to a GOBankingRates survey that asked people about their 2015 financial resolutions. In fact, saving money is Americans' No. 1 financial goal this year. The problem, however, is that 37 percent of those surveyed said they think they're too broke to save. And for those who are saving, priorities varied by age group: Millennials are trying to save most for a big-ticket purchase, like a car, while baby boomers are focused on adding to their retirement fund.

That may not be all that surprising, but what stands out is that younger Americans aren't preparing to save money in case of an emergency. There are a number of good reasons to save money, whether it's for retirement, a home, a car or even a much-needed vacation. Although this may not always be the case, most people's first priority should be to have an emergency fund to help cushion themselves from unexpected expenses. In addition, starting an emergency fund is a great way to build toward your long-term financial goals, such as saving for retirement. It can be the first step toward financial security.

How to build your emergency fund

As good as our planning may be, life rarely goes according to plan. This is especially true when it comes to personal finances. Your car might break down, or you could incur an unexpected medical expense -- it happens. That's why being prepared for such an event is so important. It's easy to fall into credit card debt when you don't have a safety cushion, and you could be in trouble if you don't have any money saved when an urgent need arises. Here's how to prepare for such a situation:

1. Figure out how much you need. A common rule of thumb is to save anywhere from three to 12 months' worth of expenses. This will probably be less than three to six months of your salary, especially when factoring in the taxes taken from your paycheck. It's good insurance if you lose your job and need to pay the bills without a main source of income for an extended amount of time. Saving that much money still might look like an insurmountable goal, so start even smaller. Financial expert Dave Ramsey recommends that your first step is to save up $1,000 and go from there.

2. Isolate your fund from daily use. Emergency funds should be liquid, meaning they need to be available whenever needed. The problem, however, is that it can be tempting to dip into it if you put it with the rest of your daily spending. Another issue is if you tie up your funds into a CD or savings bond. Sure, the money is guaranteed, but it'll take months or years for the interest to appreciate and there can be nasty penalties for withdrawing early. That's where online savings accounts come in handy. They offer higher interest rates than savings accounts offered through traditional banks (and are competitive with short-term CDs, as well) and the money is available anytime you need it.

3. Continually add to it. Treat saving money like it's a monthly expense that needs to be paid off every month. Start small -- $50 or $100 a month, if at all possible. Your emergency fund will grow at a healthy rate and you won't notice the missed income after a while. Try and find ways to cut back on discretionary purchases as much as you can, at least in the beginning. Add money to your fund directly from your paycheck with direct deposit so you don't even see the money or have the temptation to spend it. Don't worry -- it'll be there when you need it.

4. Try saving exponentially. You might be saying, "Fifty dollars a month is a lot of money to me. I need that income every month!" That's understandable and true, so let's take an even smaller approach to saving your money. Try the 52-week money challenge. Here’s how it works: Save just $2 your first week, then $4 the second week, and $6 the third week, etc. After 52 weeks, you'll have $2,756! Even if you stop after 26 weeks, you'll still have $702. This kind of exercise is a good way to build confidence in yourself and learn that saving money is possible, and it doesn't take leaps and bounds to get there. It all starts with one baby step.

Read more about how you can save money and how online savings accounts may be the best option for you.

This blog post originally appeared on NextAdvisor.com.

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