How to build an emergency savings account

By Gina Miller

Not many things are certain in life, except death and taxes, but most people today would agree that the unexpected financial emergency should be added to the list of certainties.

According to a 2014 study, 26 percent of adults have no emergency fund.

If you are contemplating using credit cards for emergencies, here are a few ideas for building an emergency cash fund instead of increasing your debt load.

"People may wonder how large their emergency fund should be, but there are lots of variables to consider with that, one being how large is your family?" says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. "What shape is your health insurance in? Do you have accident insurance? What about repairs to your home, might you have a homeowner's warranty or are you on the line for all of those?  How old are your vehicles, do they frequently break down?"

Once you've made an extensive list of fixed and variable costs, the next step is to track your expenses for 30 days.

"Write down every cent you spend," advises Cunningham. "If I were to ask you how much is your rent, mortgage or car payment you would tell me, but if I asked you how much you spend each month eating out, I'd get the deer in headlights look.

"So, let's track that small spending and see where the money goes, then bring the family together at end of 30 days, put the spending out on the table and review it. By simply looking at how it was spent you are going to be able to plug the leaks," says Cunningham.

A simple way to save is using a 10x10 formula. Try to find 10 spending categories where you shave $10 off each category each month. That will give you an extra $100 a month for savings you will never miss.

Another idea: if you receive an income tax refund, adjust your W-4 to reduce your amount of withholding allowance.

"In recent history, the average refund has been $3,000," says Cunningham. "That translates into $250 each and every month. I'm going to suggest that extra $250 could be better spent by you, either to build that savings account, to pay down debt or to invest."

If you can't find anywhere to trim your spending, it may be time to look at ways to increase your income.

"You may be forced into getting a second job," says Cunningham. "But that may not be as bad as it sounds. Look for a job where you can do something that you enjoy doing."

Once you have a savings plan in place, revisit your plan periodically to make sure you are on track, as living expenses do rise. And remember, using your credit cards as your umbrella for that rainy day fund will only leave you soaking wet in debt in the long run. 

See related: Credit lessons learned from Superstorm Sandy, Q&A: How to save $1,000 a month, What to look for in an emergency credit card

Published: October 10, 2014

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Updated: 10-26-2016

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