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Skyline 101: Emergency Savings Plan

Emergecny Funds | What to do, and how to do it!

10.4.2024

Creating an emergency fund is a crucial step in financial planning, and using a credit union can offer benefits such as higher interest rates and lower fees compared to traditional banks. Here’s a step-by-step plan to build an emergency fund at a credit union:

1. Set a Goal for Your Emergency Fund

Determine the Amount Needed: Aim to save 3 to 6 months’ worth of living expenses. Calculate your monthly expenses (rent/mortgage, utilities, groceries, transportation, insurance, etc.) and multiply by 3 to 6 to set your target.

Consider Your Financial Situation: If your job is stable and your expenses are low, 3 months might suffice. If your income is variable or your job is less secure, aim for 6 months or more.

2. Choose the Right Account

Open a Savings Account: Select a high-yield savings account at your credit union specifically for your emergency fund. Ensure it’s separate from your regular checking account to avoid temptation.

Consider a Money Market Account: If your credit union offers a money market account with higher interest rates, this could be a better option. These accounts often have higher minimum balance requirements but offer better returns.

3. Automate Your Savings

Set Up Direct Deposit: Allocate a portion of your paycheck directly into your emergency fund account. Automating this process ensures consistent savings without the need for manual transfers.

Automatic Transfers: If direct deposit isn’t an option, schedule automatic transfers from your checking account to your emergency fund on payday.

4. Start Small and Increase Gradually

Begin with a Manageable Amount: Start by saving a small, consistent amount each month, such as $50 or $100, depending on your budget.

Increase Contributions Over Time: As your financial situation improves, gradually increase the amount you save. For example, after paying off a debt, redirect that payment into your emergency fund.

5. Reduce Unnecessary Expenses

Review Your Budget: Identify and cut back on non-essential expenses (e.g., dining out, subscription services) to free up more money for your emergency fund.

Redirect Savings: Any money saved from reducing expenses should be added to your emergency fund.

6. Use Windfalls Wisely

Deposit Unexpected Income: Any bonuses, tax refunds, or financial gifts should go directly into your emergency fund.

Match Bonuses: If your employer offers a bonus, consider matching a percentage of it as an additional contribution to your fund.

7. Monitor and Review Your Progress

Track Your Savings: Regularly check your account balance to stay motivated and ensure you’re on track to reach your goal.

Adjust as Needed: Life circumstances change, so reassess your emergency fund needs annually and adjust your contributions if necessary.

8. Replenish After Use

Use Only for True Emergencies: Only dip into this fund for genuine emergencies like medical expenses, car repairs, or job loss.

Rebuild Promptly: After using any of your emergency funds, make it a priority to replenish the account to its original target amount as soon as possible.

9. Maximize Your Returns

Look for Higher Rates: Periodically review your credit union’s savings account options or consider switching to another institution if better rates are available.

Avoid Fees: Ensure your emergency fund account is free of maintenance fees or minimum balance requirements that could erode your savings.

10. Consider Adding a Safety Net

Establish a Line of Credit: If your credit union offers it, consider opening a line of credit as an additional safety net for larger emergencies, though it should only be used as a last resort.

Conclusion:

By setting clear goals, automating your savings, and making smart financial decisions, you can build a robust emergency fund at your credit union. This fund will provide financial security and peace of mind in case of unexpected expenses.