Unexpected expenses can arise out of nowhere and create a lot of stress. Yet, it doesn’t have to if you have a plan in place. Conventional wisdom suggests you should have enough money set aside in an emergency fund to cover at least three to six months of expenses. Many are finding it hard to save in the current economic climate of rising prices and inflation. However, establishing an emergency fund can be accomplished with the right preparation and planning.

Evaluate Your Current Spending

The first step to establishing an emergency fund is understanding your current financial situation. A good place to start is by creating a budget. A budget can help you identify your cash flow, how much you have coming in and going out, and highlight areas where you can cut back or eliminate spending. An excel spreadsheet is a great tool for not only creating a budget but also helping keep track of your cash flow. It will help you highlight some hidden areas where you spend your money on things that are non-essential such as rent/mortgage, utilities, and groceries.

Understanding your budget will allow you to identify opportunities to start putting money aside for your emergency fund. This will put you in a position to stress less and avoid more costly options like credit cards or pay day loans to finance unexpected emergencies. To stay motivated think of how good it will feel to have money set aside.

A concern some have to building up an emergency fund is the thought the money should be going toward paying off debt before setting aside money for savings. It’s important to understand the type of debt you have. For example, debt with a high interest rate such as credit card debt, should be paid back as soon as possible, while an auto loan or mortgage will typically have a lower interest rate, and making payments on time should help build up your credit score.

What if I can’t afford to set aside 3-6 months?

If setting aside savings of three to six months of expenses seems daunting, then start small. The Consumer Federation of America indicates an emergency savings fund should consist of at least $500. One way to get started is to create a savings system for making consistent contributions. You can set up recurring transfers through your bank or credit union, so money is moved automatically from your checking account to your savings