What You Need to Know to Start an Emergency Fund

Having a safety net for life’s unexpected expenses can help you better manage life’s ups and downs, especially as you head into retirement.

At one time or another, we’ve all had to deal with a few curveballs —  an out-of-the-blue expense, losing a steady paycheck, or having to pay a larger than expected medical bill. 

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If you’re already struggling to make ends meet, saving money each month for emergencies like these may seem out of reach. But financial experts agree that socking away even a small amount of money can help protect your financial future. 

If you don’t already have one, your first step should be to start an emergency fund. AARP Foundation has outlined everything you need to know, including how to start saving when money’s tight.

What is an emergency fund?

Simply put, an emergency fund is money you save for a rainy day so you can recover quickly when the unexpected happens. Financial experts recommend saving three to six months of your expenses in a savings or checking account you can access easily during an emergency. 

If that sounds impossible, you’re not alone. Most Americans (63%) don’t even have a month’s worth of income set aside, according to the Consumer Financial Protection Bureau.

Consider that even if you can only save $20 a week, you’ll still have enough money set aside by year-end to pay for a $1,040 emergency. And that amount can help you avoid taking on a high-interest payday loan that will put you further in a financial hole over time.

How to build your emergency fund

Begin by setting a goal, no matter how small, to make saving become more of a habit. Here are some ideas on how to get started.

Pay yourself first. Set up automatic payroll deductions or bank transfers into a separate account, starting with a small amount such as $20 a week. Continue to adjust the amount upward as your income changes.

Bank your tax refund. If you receive other windfall money like a bonus check or a rebate, use some or all of it to add strength to your safety net. Do the same with the money refunded when you return items to the store.

Sell something. Go through your closet and see if there are garments or accessories with tags still attached. Even if an item is gently used, ask yourself if someone could find more value in it than you do. If the answer is yes, attach a price and list it for sale online.

Grow your savings with a high-yield savings account. High-yield savings accounts offer better-than-average interest rates, and they usually allow you to take out cash fast and without any penalty charges. It’s like getting paid to save. 

Start a side hustle. More people than ever are earning extra money with freelancing gigs or contract work. AARP Foundation offers resources and support for a variety of self-employment options that can help you find cash for your emergency fund. 

Remember, as you work toward funding this account, take time to celebrate your successes. Once you reach your first savings goal — let’s say $200 — pat yourself on the back. Find a simple way to treat yourself so you stay motivated to continue building this important safety net.

Consider that even if you can only save $20 a week, you’ll still have enough money set aside by year-end to pay for a $1,040 emergency.