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There are plenty of Americans who don't have any savings (one estimate puts it around 26%).
That's a scary situation to be in, even with dual income.
What if you get laid off from your job (or if they reduce your pay/hours)? What if someone gets injured? A car repair can sometimes be a big wallop too.
If you two don't have an emergency fund and you want to get started, here's a step by step guide on how to build an emergency fund that fits your family.
Two heads are better than one and couples have the ability to pool their resources to achieve goals quicker.
To illustrate the process, I'll be using a fictional couple, Hal and Maddy throughout this post.
While they may not mirror you exactly, I hope their example can get you motivated to save.
How Big Should Your Emergency Fund Be?
First off, there is virtually no way to predict every bump in the road of life, but the two of you can brainstorm some possible scenarios over a cup of coffee. An emergency fund is about covering for an unexpected event that could happen given your circumstances.
It doesn't have to be an epic discussion, you two are looking for one or things you think will ruin your budget.
Our couple, Hal and Maddy, are tired of having hiccups set them back on their debt payment plans.
Based on some car problems they've been having, the two decide that they want to have $1,500 in the bank.
Right now they are paying an extra $100/month on their credit cards, but that will be used for the starter emergency fund instead.
Starting Point: $100/month -> 15 months to getting starter fund up
Looking at the timeline, the two want to get savings ready much quicker than that so they decide to look at their budget and trim some expenses.
Running The Numbers Together
You have to go beyond just sharing information when trying to change behavior, especially when it comes to money.
If you prefer, you can use a free tool such as Mint to pull that data so you can have an objective look at how much money is currently coming in and where it's going.
While it can be tempting to harp on bad spending habits, most couples find it counterproductive. The goal is to identify where you two can cut back, not put each other on the defensive.
Starting and Building Your Emergency Fund
With a goal in mind and some money ready to be deposited, the next issue is finding the best spot to keep your emergency fund.
Keep in mind the purpose of it, you two will need to focus on 3 things:
- Easy access to it in case of emergency – It does you no good to have a high interest rate if you can’t get to it quickly when it’s most needed. When your car breaks down or your washer breaks, you need the money NOW.
- Safe place to store your money – Whatever you choose, make sure it’s either covered by the FDIC (banks) or NCUA (credit unions).
- A place where it can grow – If you can earn a decent interest rate for your savings while meeting the two previous criteria, then go for it.
For us, we chose Capital One 360 as it offered us the security and access we need along with a competitive interest rate. (If you want to open a savings account with Capital One 360, simply click here to get started.)
If you prefer a brick and mortar option, try your local or regional credit unions and banks.
They may offer the service you deserve and some offer great rates for your savings.
‘Finding' Money for Your Emergency Fund
It basically comes down to either cutting your expenses or earning some income.
If you're looking for a detailed list of ideas for both, I highly recommend you go through my 50/50 Challenge, where we spent a month sharing tips on building a buffer in your budget for your goals.
Optimizing Your Budget
Some of these changes are one time, some of these may be done for a limited time (perhaps one month), or you two may discover than you like the change so much you keep it.
It doesn't matter, the goal is to find different ways to trim back your spending so you can have a start fund ready as soon as possible. Where you go from there is up to you.
- Cut back on eating out. Pack your lunches and prepare home cooked meals for a month.
- Raise your deductibles. Call your insurance account and see if raising your deductibles will significantly save you money.
- Cut the cable. If you've noticed your cable bill has been creeping up, but you're not getting much enjoyment from it, go ahead cancel your service. You can also always turn it back on later if you miss it.
- Adjust your thermostat. With summer wrapping up, you may want to go ahead and start weaning off the air-conditioning by raising your thermostats a few degrees. If you're not keen on the change in temps, program your thermostat to adjust while you're at work or sound asleep. You won't notice, but your wallet will.
- Save on your contacts and eyeglasses. Depending on your prescription, you may be able to save hundreds of dollars on your eyeglasses by using online retailers like Zenni Optical.
- Shop generic. Next time you hit the grocery store , go ahead and buy the generic brands. Even if you only focus on things that don't matter much to you, you'll still be shaving off some cash.
- Utilize your credit card perks. You may be able to get some great discounts using your credit cards. Check with your current one to see if they have price protection, which can refund you the difference if you find a better price within a certain time frame (30 or 60 days).
Gamify Your Savings
Each couple will come up with a list that works for their situation.
If you're stumped on where to begin, go back to your expense review and pick one or two expenses that you know you can cut back on.
For our couple Hal and Maddy, we'll pick:
- Eating Out: Maddy would want both of them to go straight to brown bagging lunch and skip eating out, but Hal enjoys his lunches outside the office. As a compromise, he'll limit where he goes for lunch, cutting back from $15/lunch to about $7 each. This will save about $160/month. Maddy is going to brown bag lunch Monday through Thursday, saving about $28/week or about $112/month.
- Cable TV: Our couple bites the bullet and decides to cancel their cable service, but keep their internet service. This move will save them $50/month.
These two changes will bring their starter fund contributions to $422/month which means they will have their starter fun up and ready in just over three months. Any additional changes they make will only speed it up further.
Boost Your Income By Earning More
While some couples find cutting expenses a breeze, other couples may already be living tight and need a boost in income.
Here are a couple of ways you can add some money into your emergency fund.
- Sell your stuff. Get rid of all of your junk online or locally. My favorites for both are eBay and Craigslist.
- Babysit. You don't have to open up a home daycare, but you may want to watch a little one or two for an evening or some time on weekends.
- Get a second job. Find a temporary job and use those paychecks to feed your savings.
Keep Plowing Into Savings or Pay Down Debt?
The two of you can then decide which would be a better course of action – using your monthly contributions to pay down all your high interest debt before you fully stock your emergency fund or set aside a bit of money to slowly grow your stash.
If you're think of tackling both goals, yo may want to check out the 75/25 method.
Basically 75% of your contributions go toward debt reduction and 25% is used to beef up your emergency funds.
This method can be a good fit for your family if you're concerned that a starter fund won't be enough to keep you feeling secure as you pay down your debts.
Speaking of a stocked emergency fund, when coming up with that amount, you two should consider a few things to make it fit your family's particular needs:
- Family Size – If you’re a dual income couple with no kids or other family obligations, then you’ll probably won’t need as a big of en emergency fund as a family of 5.
- Family Expenses – Your family’s lifestyle has a big effect on the size of your emergency fund. If you have high monthly expenses, then logically, you’ll need more money to save. If your expenses are due to unnecessary spending, then you may want to discuss ways you can lower it. If it’s due to circumstances (i.e. medical bills), you’ll have less room to work with. It’s still possible though to explore options to lower your bills.
- Income Streams – If you have two or more income streams coming in, that can decrease the size of your emergency fund. You should still have one though, as unexpected events can happen.
As you can see, couples in similar circumstances can have completely different numbers, so don't get too stressed over what is the ‘right' amount.
Thoughts on Building Your Emergency Fund
I hope you enjoyed this post and have some new ideas on how to get an emergency fund started for your family.
For those who have made this milestone already, I'd love to get your take – how much savings works for the both of you? How did you ‘find' the money?