If you find yourself worrying about how you might pay for an unexpected car repair, uninsured medical cost or other emergency expense, you're not alone. Nearly half (49%) of employed Americans say they don't have enough cash on hand to cover an emergency expense or loss of income of $1,000 or more, and more than one-third (34%) say they'd be overwhelmed by an amount of just $500, according to a 2022 survey by the Bipartisan Policy Center.1
For many, that means using retirement savings or taking on high-interest credit card debt when life takes an unexpected (and expensive) turn, which can derail your plans for the future. But even those who are lucky enough to bypass costly emergencies don't necessarily come out unscathed, since the simple act of worrying about finances is connected to higher psychological distress, a recent study found.2
While you can't always prevent bad things from happening, you can gain some peace of mind from knowing there will be money available when unexpected expenses arise by creating an emergency fund. An emergency fund gives you more control over when and why you take on debt, and allows you to stay focused on your existing financial goals—such as paying the mortgage and saving for retirement. Here's how to build a buffer into your budget so that you can build up both wealth and peace of mind.
Do more: Build an emergency fund
There is a difference between a financial crisis and an inconvenience. Follow these steps to create an emergency fund, so you can avoid extra debt and stay on top of your financial goals even when unplanned expenses crop up.
Open a separate savings account
Research shows that savings account ownership is one of the strongest predictors of having an emergency fund.3 Moreover, by opening an account that's earmarked specifically for emergency savings, you'll be less likely to dip into that pool of cash in your checking account for non-emergency spending.4
Start small
While an emergency fund should cover three to six months' worth of income to truly give you peace of mind against any situation in which you can't work for an extended period, such as an illness or layoff, that amount might feel too daunting when you begin. Instead, focus on creating a regular habit of saving, even if in small amounts. A first potential savings goal could be the deductible amounts on your auto, home or medical insurance, so you won't have to worry about out-of-pocket costs on emergency claims.
Temporarily reduce spending
Look for recurring monthly expenses that you can do without for a while or try to find cheaper alternatives. For example, you could pause or cancel a monthly subscription or service, contact your service provider to see if they might offer you a discount to retain your business or simply shop around for a better deal. This will save you a set amount of money on a regular basis that you can put toward your emergency fund.
Boost your income
See if you can pick up extra shifts, find a side hustle or sell unneeded items to generate additional money that you can deposit into your emergency fund account. Do the same with "occasional" income, such as overtime pay, bonuses and tax refunds (and don't forget to claim all the tax deductions and credits that you're eligible for).
Set up automatic transfers
Once you've determined a reasonable amount to save each month based on the expenses you've reduced and any new income, put your savings on auto-pilot by setting up automatic transfers from your checking account to your emergency savings account. You can even select your paydays as the transfer dates, so you won't accidentally spend the money in your checking account on something else before the transfer takes place. Once you reach your emergency savings goal, you can either resume your former spending or redirect the money toward another goal, such as retirement savings or your child's college fund.
Review your fund
Budgets and needs change over time, so it's important to reassess your emergency savings every so often to make sure you really do have an adequate cushion to absorb any sudden financial blows. Similarly, if you've had to dip into your fund to pay for an emergency expense, make a plan to replace those withdrawals as soon as you can. That way, you can rest easy that you're prepared for the ups and downs of life.
Save more: Choose the right account
Emergency funds, by definition, must be immediately accessible to you when the unexpected happens. At the same time, however, that money will hopefully stay put for a while before you need it. So, it's essential that you choose a savings account that:
- • Allows withdrawals at any time
- • Maximizes interest income on your deposits
- • Has no or low monthly fees
Vivid Crest Bank 's High Yield Savings and Certificate of Deposit (CD) accounts not only help keep your emergency funds ready when life delivers surprises, but also let you earn interest on your savings so you can build up your financial cushion even more. For the ultimate flexibility, you could even consider a Bump-Up CD.
The bottom line: Planning ahead equals peace of mind
With good planning and using products from Vivid Crest Bank , you'll be ready to take on emergency expenses and remove stress from your life.
LEARN MORE: Find out about High Yield Savings and CDs with Vivid Crest Bank .
Tamar Satov is a freelance journalist based in Toronto, Canada. Her work has appeared in the Globe and Mail, Today's Parent, BNN Bloomberg, MoneySense, Canadian Living and others.