How to start an emergency fund—the right way

When Ben Franklin declared that nothing is certain except death and taxes, he probably could have added unplanned expenses to the list. Because where money emergencies are concerned, it’s not if, but when.

While you can’t plan when your water heater will quit or your car tire will go flat, you can be prepared with an emergency savings account. Think of it as a cash cushion to absorb the blow when life throws an unexpected punch. Having money in the bank when you need it most can help provide financial stability you can build on.

Emergency savings is meant to help pay expenses that are usually urgent and unavoidable. If you suddenly need to travel to care for your mother, for example, or your cat needs surgery, an emergency fund can help carry you through the crisis.

Resist the urge to consider your emergency savings account a vacation fund. And try to avoid tapping into it for predictable expenses, too, such as birthday gifts, auto insurance premiums or routine medical expenses.

A common benchmark is to save enough to cover expenses for three to six months in your emergency fund. Building up to that amount over time can give you confidence that you can manage financially if you lose your job or aren’t earning an income due to health issues, for example. And you’ll have money in the bank for smaller emergencies, too.

“I can’t stress enough how important it is to do this,” says Autumn Keller, Thrivent wealth advisor. She encourages all her clients to make saving for an emergency fund part of their foundational priorities. “But how much you have in it is a very personal decision,” she says. “Some people are OK with having $3,000 or $4,000 in it, while others don’t feel comfortable until they have $50,000 set aside.”

The more you save, the more flexibility you could have when you’re forced to use your emergency funds for a longer period of time. As life takes its twists and turns, your financial needs will change, too. With every job change or family milestone, you will want to reevaluate your savings needs.

In a true emergency, you’ll need your money to be accessible. You also want the account to be low-risk. Some common places to keep your emergency fund include:

• A traditional or high-yield savings account
• Money market account
• Money market mutual fund
• Certificate of deposit (CD)

If possible, save your cash reserves in an account separate from your checking and other savings. Keeping the money at a different bank or credit union will help reduce the temptation to use it on impulse.

If your plan for facing financial emergencies involves using your credit card or line of credit, you certainly aren’t alone. But that choice could leave you facing even more debt.

Let’s say you lose your job and rely on a line of credit to pay bills. You’ll have to start making payments on that credit almost immediately, and typically you’re going to be charged a significant interest rate.

There’s potential that a brief setback until you find a job could last much longer because you’ll have to pay the interest that’s accumulating.

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Why is setting a savings goal so important? Having a clear and detailed goal, along with a plan, influences the spending decisions that you make each day.

One way many people structure their goals is using the SMART method, an acronym that encourages you to make your goal specific, measurable, achievable, relevant and time-bound. SMART goals start with broad ideas about what you want to achieve, then help you map out the detailed approach you'll take to get there.

A general statement, such as "I want to start an emergency fund" is a nice start. The SMART framework can form that into a goal that incorporates specificity, measurability, achievability, relevancy and a timeline, so that it becomes "I want to spend the next two years building a $4,000 emergency fund for unexpected expenses, and will set aside $200 per month from my budget into a high-yield savings account."

From streaming services to utility bills, virtually every expense can be paid automatically from your spending account. Likewise, your contributions to tax-deferred retirement accounts at work may be automatically deducted from your paycheck. Consider adding your emergency savings to the list of accounts you already automate. Then it can grow without any decision-making effort from you.

Ways to automate your savings:

• Schedule automatic transfers. Scheduling regular transfers can help ensure you add to your savings at an interval of your choosing. It could be on payday or a certain day you pick each week or month.
• Dedicate a portion of your paycheck from the start to savings. Request that your employer deposits a portion of your paycheck directly into your savings account. Where saving is concerned, you might have more success saving first versus hoping to set aside money after all your other expenses are covered.
• Use savings apps. You can find a wide range of apps that foster savings directly to an account you designate. Find out if your bank or credit union offers a round-up option to build your savings every time you make a purchase.

In addition to automatic transfers, you might save all or part of various windfalls you receive during the year, such as gifts, rebates, bonuses, tax refunds and inheritances.

You may be asking, “How can I save money when I’m trying to pay off my debts?” And it’s a valid question. Having some money saved might help you avoid adding even more to your debt when the next unplanned expense pops up.

Starting small with your savings is better than not starting at all. Take a look at your regular expenses to see if you can dedicate some money every week to set aside in your emergency account.

Let’s face it, your emergency savings serves a purpose. If you need to use some of the money to cover an unplanned expense, commit to replenishing your account. It’s another way to reinforce your decision to save in the first place.

“People often get more disciplined about spending when they see the potential power of saving,” says Keller. And when that happens, you might just free up even more money. “There’s no substitute for savings, even if it’s a small amount.”

The more prepared you are for the emergencies you will encounter, the more confident you may feel about the future. Talk with your financial advisor about ways to maximize your savings goals, or sign up for Money Canvas from Thrivent—a free coaching program that helps you build healthier budgeting, saving and spending habits.