It’s the first rule of wealth building: Pay yourself first. It means putting aside funds, ideally 5% to 10% of all sources of income (before paying bills and other expenses), into an emergency savings fund. Your goal: To accumulate and maintain at least nine months’ worth of your annual household expenses or annual income.
In a crisis, your emergency savings fund can spell the difference between financial difficulty and financial disaster. I call it your income interruption fund, because unemployment, illness, injury or other disruption of your ability to generate income are the only reasons to ever spend this money. If you ever have to use these funds, it should be replenished as soon as you get a new source (or new sources) of income.
Creating an emergency savings fund starts with budgeting for it. You’ll have to get additional income, cut expenses, or do some combination of both, to fund it. Here are other do’s and don’ts of building up your emergency cash reserves:
Don’t link your emergency savings fund to the debit or ATM card you carry every day.
Doing so will make it too easy and tempting to dip into your emergency savings fund when you shouldn’t. But unless you have a true crisis—for example, the car you use to get to your job breaks down—focus on pushing money into your emergency savings fund, not taking money out.
So insulate your emergency savings fund by keeping it in an account at a saving institution other than your main bank. Online bank accounts are great options for this. You should still be able to transfer money from your emergency fund to your main checking or savings account when you really need to. However, transferring funds between banking institutions usually takes 2-3 business days (unlike the instant transfer of money possible between linked accounts at the same bank), protecting your emergency savings from any overwhelming impulses you might have to spend it.
Do save from every paycheck.
Even as little as $20 every payday is better than nothing, and it will add up over time. Also save at least 50% of every dollar you get from other sources of income, including bonuses, cash gifts, tax returns—even lottery winnings. Picking up a part-time or seasonal job is a great way to build up your emergency savings even more quickly.
Don’t touch your emergency fund unless it’s a true emergency.
Examples of real emergencies include the loss of income or the need to spend to keep money coming in, like repairs for the car you depend on to get to work. Holiday spending, family vacations, and that big sale at your favorite store are NOT emergencies.
Do make it automatic.
If you have to think about it, chances are, you won’t do it. (It’s why taxes are automatically withheld from your paycheck, instead of you being trusted to make the payments.) So if you receive your pay via direct deposit, arrange with your employer to have the portion earmarked for your emergency savings fund to be automatically deposited into the bank account you’ve designated for it.
If you don’t have direct deposit, set up your main bank account so that the amount you’ve budgeted for emergency savings is automatically transferred to your emergency savings fund on a weekly, bi-weekly, or monthly basis.
Your goal is to set it and forget it so that your emergency savings fund has a chance to grow without you having to remember to make deposits—or being tempted to make non-emergency withdrawals.
Do start NOW.
Don’t wait until you have a better job or extra money to save. When has anyone really ever had “extra” money? Better to start with small monthly contributions to the fund now, than to kid yourself into thinking that you can afford to wait and contribute more (and it will take a lot more to catch up) later.
And if you already have an emergency savings fund, commit to increasing it annually, especially as your income grows via raises, promotions, and other sources. The more you contribute, the faster it will grow, and the more likely you’ll have the funds you need when you need it the most.
Black Enterprise Executive Editor-At-Large Alfred Edmond Jr. is an award-winning business and financial journalist, media executive, entrepreneurship expert, personal growth/relationships coach, and co-founder of Grown Zone, a multimedia initiative focused on personal growth and healthy decision-making. This blog is dedicated to his thoughts about money, entrepreneurship, leadership and mentorship. Follow him on Twitter at @AlfredEdmondJr.