Want to Improve Your Finances? Start With This Important Step

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You probably have a lot of competing financial priorities, but there’s one that should be at the top of your list. Here’s what you need to do. [[{“value”:”

A lot of financial moves have lasting, positive effects on your finances. Paying off credit card debt can give you more money to spend each month. Putting cash away for retirement can make your future a little more comfortable.

These are great habits to start if you haven’t already, but they’re probably not what you want to focus on first. There’s one financial goal that should always come ahead of the rest.

Prepare for the unexpected

We can have the perfect budget that covers all our expenses. We can be diligent savers who prioritize our long-term goals. But neither of those factors is much help when unexpected costs arise.

It happens to everyone. An appliance breaks. Someone in the family visits the ER. You back up into another vehicle in a store parking lot. These issues can leave you with bills worth hundreds or even thousands of dollars.

If you have no way to cover them, that perfect budget goes out the window and those regular savings transfers cease. You could even wind up in debt that you might spend months or years paying off.

You need an emergency fund if you hope to avoid this. This is extra cash you keep on hand in a high-yield savings account to cover unplanned expenses. How much you need varies, depending on your lifestyle. But everyone could benefit from having a little something set aside.

How to build your emergency fund

Here’s what you need to do to build your emergency fund from scratch.

Plan what you need

Determine how much money you need to save in your emergency fund. As a general rule, you want at least three to six months of living expenses. Some people include all of their expenses, even discretionary items like streaming service subscriptions. Others focus on just their essential costs.

Either is fine, but if you opt for just the minimum expenses and lose your job, you may have to cut back on discretionary expenses for a while. Some people feel more comfortable saving six to 12 months of living expenses. This is a good idea if you worry that it could take you a long time to find a new job should you lose yours.

Decide on your savings strategy

Once you have a target in mind, the next step is to save for it. If you already have some money set aside for emergencies, subtract this from your target amount to figure out what you still need to save.

Then, decide how much you can afford to set aside for emergencies each month. This is up to you. Larger contributions will help you build your emergency savings faster, but it may have more of an effect on your lifestyle today. Try to commit to regular savings deposits each month. You may be able to set up a transfer from a linked checking account if you don’t want to make your contributions manually.

Choose where to keep it

A high-yield savings account is a great option for an emergency fund. These accounts typically don’t have maintenance fees and they offer higher interest rates than you’ll find with brick-and-mortar banks. They also don’t impose many limits on how you can access your funds.

The only downside you could encounter is that most high-yield savings accounts are available through online banks. They don’t have branches and many don’t offer ATM cards, either. So you might have to first transfer your funds to a checking account when you need to withdraw them. This could cause a slight delay in accessing your cash.

Put your plan into action

Once you’ve got your plan in place, it’s time to put it into action. Check in with yourself after a couple of months to see how you’re doing. You may need to revise your savings goals.

When you inevitably have to tap your emergency fund, you’ll need to repeat this process to rebuild your emergency savings up to its previous level. Act as promptly as you can, so you’re prepared for the next emergency.

You may also want to review your emergency fund at least annually to ensure it’s still adequate. If your lifestyle has changed significantly — say you moved to a new home or welcomed a child into the family — that will affect how much you need in your emergency fund.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Kailey Hagen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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