Before Emergency Strikes

How to Start an Emergency Fund

You would do everything in your power to keep your family safe from natural disasters, intruders, disease, and any number of unplanned events. But many of these unplanned events can come with a hefty price tag. In these times, you’re stressed and uncertain about the future. You don’t want to add financial troubles to that list of worries.

September is National Preparedness Month, and here at Availa Bank, preparedness is what we do best. Now, when you think of being prepared, visions of fire escape plans, tornado safety rules, and survival kits probably come to mind, but preparedness can come in many forms. For example, here at the bank, being prepared means creating an emergency fund to cover life’s unexpected expenses.

Creating an emergency fund can stop you from tossing and turning all night. As you continue to read this blog, you will learn all about the different types of emergencies, how much money you should save in the emergency fund, how to budget to reach that goal, and more.

What Qualifies as an Emergency?

This may seem like a no-brainer question to some of you, but not every situation is easily defined as an emergency vs. a non-emergency. Let’s walk through a few different scenarios and determine which is an emergency and which is not.

  1. Your car is due for an oil change or other routine maintenance.
    1. Since this is a regular maintenance issue you should plan for, this payment should not come out of an emergency fund. You can budget your monthly income accordingly to cover the costs, even if it only happens a few times a year.
  2. Your significant other falls off the roof while making some repairs and needs to be taken to the hospital.
    1. This is a 100% unexpected event, meaning the money to pay for the hospital bills can come from your emergency fund. Since personal health is so unpredictable, most health-related expenses count as emergencies and can be covered by this fund, especially if it requires a trip to the ER. You may have good health insurance, but it doesn’t always cover everything . Keep in mind, you may want to create a separate health savings account once things get back to normal so the next accident doesn’t completely derail your financial plans.
  3. During a major storm, a tree falls and lands on the roof of your house, causing significant damage.
    1. This is another great example of an unpredictable event. Your home insurance is likely to cover the cost of the damages to your home and property in this case, but if you don’t have home insurance or your insurance company ends up not covering it, you’ll need funds to back up the repairs.
  4. Your friends just invited you to vacation in Cabo next month.
    1. Just because your friends invited you last minute does not make this one an emergency. You should tell your friends to give you more notice next time, but don’t dip into your emergency funds to pay for the trip. It’s never a bad idea to start a vacation savings fund for situations like these, so you can take that spontaneous vacation in the future.
  5. You are in a car accident. You didn’t get hurt but your car is totaled.
    1. You can’t predict an accident. That’s why it’s called an accident. Your car insurance may not cover all the damage to your vehicle, depending on your insurance plan and the situation leading up to the crash. This is where your emergency fund can help.
  6. You saw a TV show about landscaping and are now wanting to redesign your entire backyard before you have a get together with friends next month.
    1. This is a classic example of needs vs wants. It may seem like you NEED to have the best decorated lawn to impress your neighbors and friends, but it’s not essential. Updates that improve the look but not the functionality of your home are a choice, meaning that in this case you should start a different savings category to save money for those changes.
  7. A family member that lives across the country dies and the funeral is next week.
    1. You can’t predict a death. An emergency fund can help you get where you need to go when you need to be there. This is the time for everyone to be together, not stuck at home because they couldn’t afford a plane ticket.
  8. Due to economic downturn, you are laid off from your job and it has been several months since you last worked.
    1. Depending on the job you have, it may be hard to quickly find another in your field. Whether you’re laid off for three to six months, or even a year or more, emergency funds can help you pay for what you need in the meantime. That way you can focus on landing the perfect job with the salary that reflects your experience and expertise.
  9. Everywhere you turn, your child has destroyed another object or part of your home that needs to be replaced or repaired.
    1. If you have young children, you know how destructive they can be. It’s nearly impossible to predict what will happen in your house from day to day when they’re that age. Emergency funds can be used to cover the costs of everything from covering up your child’s creative wall art to replacing damaged flooring.

How Much Money Should I Put in the Emergency Fund?

This is a tough question to answer, as prices can range greatly depending on where you live. Planning your emergency fund amount is easier if you have set house payments, a steady income,  a reliable car, and quality health insurance to fall back on when times get tough, but if you don’t have any of those, don’t worry. You can still create, build, and benefit from an emergency fund in no time at all.

If you don’t have a great income and are still struggling with a lot of debt, don’t stress yourself out right away by thinking you need to save thousands of dollars immediately in your emergency fund. When cash is tight, it’s hard to categorize your spending into needs and wants because there never seems to be enough money to go around. Don’t worry, we can help you break this cycle with some savvy budgeting. Start out small (very small) by having a few bucks directed from your paycheck directly into a savings account. You should eventually aim to have around $1,000 in your emergency fund as a base amount, building that as you need to.

Now, depending on you or your family’s health, the status of your home or car, and even the economy, you may want more than just $1,000 to fall back on. Experts often recommend that you have up to 12 months of income in your emergency fund to cover all of the bases if you are unable to get a job in that time frame or face other roadblocks. Obviously, that’s a lot of money to have saved up and it will take some time to get there. As we mentioned earlier, it’s important to make sure you clearly define what is an emergency and what is not when you’re deciding to use your emergency fund money.

Find small ways to help yourself get ahead in your goals. Every time you get a raise at work, incorporate that extra money directly into savings or paying off debts instead of spending it on things you don’t need. Any time you get a tax refund, use it to pay bills or put half towards bills and half towards savings. If you’ve already been successfully living within your means, that extra money you put in savings won’t be missed.

Where Should I Put My Emergency Fund? 

You do not have to shove your money under a mattress or into the back of the freezer to keep it safe. In fact, keeping your emergency fund somewhere in your home can leave that money susceptible to depreciation in value, whether that’s due to the elements, animals, humidity, and more. Your money is much safer at a bank. Lucky for you, at Availa Bank, we have plenty of savings account options so you can find the perfect fit and make sure your money works for you.

What If I Don’t Have an Emergency Fund Yet But I Have an Emergency? 

Life is full of surprises, and you can’t always be prepared for every emergency. If you’re new to budgeting or have just made some major life changes, you may not be settled in your emergency funds when something unexpected happens. That doesn’t mean you’re out of luck. You should always be focused on saving money back for emergencies, but in the meantime, there are several programs that can help get you out of a tough spot. If you live in Iowa, you can find assistance with:

  • Health Care – Depending on the hospital or clinic, many offer sliding payment scales based on your income level and insurance coverage.
  • Food – Programs like the Supplemental Nutrition Assistance Program (SNAP) can help you pay for groceries for your family if you are unable to. You may also try local food banks to see what they are able to provide until you get back on your feet.
  • Child Care – You may be able to receive assistance with costs related to childcare, family planning, and child support, depending on your situation.
  • Disaster Assistance – If you are the victim of a fire, flood, tornado, or other natural disaster, you may receive some financial assistance from the state or even the federal government depending on the severity of the disaster.

How Do I Start an Emergency Fund? 

When you’re first thinking about starting an emergency fund, it can feel pretty intimidating. You never know when an emergency will happen, and you may never feel like you’re fully prepared for it. However, the baby steps you take now will help you feel surer of yourself when something does happen.

The first step in the process is to sit down with all of your current expenses laid out in front of you and calculate how much money it takes for you to live. This means calculating the essentials, not things like eating out at restaurants, extra streaming services, or other fun, unnecessary items. Once you have that calculated, you’ll want to start saving three to six months’ worth of that amount. You don’t have to do this in large chunks. If you make a goal of saving $20 out of every paycheck to start, you’ll already be well on your way to a healthy emergency fund.

After you’ve started to develop some good saving habits, you can try putting the 70/20/10 budget rule to work by using 70% of your income for monthly spending, 20% for savings (for example, your emergency fund), and 10% for debt or charitable donations. This way you’ll have an established plan and won’t have to calculate how much you should save each pay cycle.

Still Have Questions on Emergency Funds? 

Preparing to save money can feel overwhelming. But it doesn’t have to be. Here at Availa Bank, we have a team of experts ready to help you with all of your financial needs. We don’t want you to be caught unprepared when disaster strikes. If you have any questions about the process, you can rest easy knowing we’re here for you. Give us a call today to get started!