December 25, 2023
Emergencies have the potential to stop us in our financial tracks. To put us in debt, or pile on the stress and worry of dealing with a costly curveball. But when you’ve got a plan in place, the unexpected doesn’t have the power to shake your finances.
Enter, the emergency fund.
Building out an emergency fund is essential for financial security and should be the first step in any solid financial plan. It’s so important, in fact, that our Co-Founder & CEO Vrinda Gupta recommends creating an emergency fund first.
We mean first, first.
Like before paying off high-interest debt or even putting savings towards investments.
So, if an emergency fund should be a part of every financial empowerment plan—what are the essential steps to creating and building your very own? We’re diving into the five key steps to take now.
First thing first – know your cash flow.
Your cash flow is your total net income minus your expenses. Knowing where your dollars are coming from (and where they’re going) each month is a pivotal first step to building out your emergency fund.
Determine how much net income (take home after taxes) you earn each month. Next, calculate your living expenses and non-essential expenses.
Knowing how much your essential expenses run you each month is key to setting your emergency fund goal. So is understanding just how much leftover cash you’ve got each month to contribute toward your emergency savings.
If there’s any constant in life, it’s that it’s filled with twists and turns. Sometimes they’re exciting, soul-lighting twists. But other times, they’re not-so-fun turns— like unexpectedly losing your job, or getting a flat tire and having to pay for a tow.
No matter the emergency, having a financial safety net will take the stress of “can I afford to get through this” off your plate. Because, yes—financially you can.
Recognizing the need for an emergency fund isn’t admitting defeat. It’s a strategic move to proactively protect your financial well-being.
You won’t risk going into debt over an unexpected expense. Because you prepared for this. And your emergency fund has got you covered.
Personal preference for how wide your safety net will be means no two emergency funds will look the same. No two incomes or expenses are the same either.
Defining your savings goal will be unique to you. But it’s important to set a specific monetary target so you have something tangible to build on (and aim towards).
How to Set Your Goal:
Experts recommend saving three to six months' worth of living expenses. Start with three, and build from there.
If you’re self-employed and your income varies, your savings goal might need to give you a bit more cushion. In this case, we’d recommend stashing away about 9 months' worth of living expenses in your emergency fund.
Putting money towards your emergency fund each month should be something you treat as essential. And it 100% needs to be included in your overall financial plan.
When deciding how much money you can save each month, refer to your budget. If you don’t have a budget set yet, we walk you through choosing the best budget for you, here.
Once you know how much money you can allot to your emergency savings each month, you’ll be able to determine how long hitting your fund goal will take.
Example — Jessie’s goal is to save 3 months of living expenses which run her $2,000 each month. She plans to save a total of $6,000.
When looking at her budget, she can put $500 each month into her emergency fund. $500 x 12 months = $6,000
It will take Jessie one year to meet her goal!
Now that you’ve set your emergency fund goal, the next step is choosing the right account to make sure the money you put in continues to grow for you. You’ll want to keep your money liquid (easily and readily accessible) and keep it all in one place.
Sequin members and financial move-makers often turn to high-interest checking accounts. And for good reason.
These accounts, offer the benefit of providing higher interest rates than standard savings accounts. With a high-interest checking account, every dollar you save earns more.
Annual Percentage Yield (APY):
When we say “high yield” account we’re talking annual percentage yield. APY represents the total amount your money can grow in a year—including earning interest on your interest.
Your money isn’t just sitting in a checking account. It’s growing for you.
Sequin offers its members a high-interest checking account of 3.56% APY. That’s 51x the standard rate.
*With that annual yield, our savvy saver Jessie from before could earn $213.60 in interest on her $6,000 emergency fund in the first year alone! *
Automate Your Savings:
Set up regular (and automated) contributions to your emergency fund, to effortlessly grow your safety net with each paycheck. This way you won’t be tempted to spend the money you want to go towards your fund before it gets there. When you automate, hitting your savings goal becomes stress-free.
Trimming Those Expenses:
Cutting unnecessary expenses can be a great way to build savings into your budget. But when it comes to cutting non-essentials, it’s going to be a personal choice what can go and what’s got to stay. We all have different spending priorities.
We don’t recommend cutting the things that bring you the most joy. Instead, look for areas where your spending isn’t aligned with your goals and cut there.
Sometimes unexpected cash comes your way—like a tax refund or birthday check. These windfalls can be game-changers in your savings strategy.
Say our girl Jessie gets a $500 tax refund. Instead of splurging on a new pair of shoes, she decides to make a strategic move with her money, putting it towards her emergency fund. Now she’s got an extra $500 towards her goal and it’ll take her one month less to meet it!
Another great way to make savvy saving moves? Credit card rewards. And using them to kickstart your emergency fund. Convert cash back or points into real, tangible savings to hit your fund goals faster.
Maintaining your emergency fund means setting yourself clear guidelines. Not only in how and when you contribute to it but also when you dip into it.
Your fund is your emergency safety net. Its sole purpose is to give you a buffer against unexpected financial shocks. If an unplanned emergency financial expense pops up you shouldn’t feel any guilt dipping into your emergency fund to pay for it. After all, that’s what it’s there for!
The most important thing is to know when it’s appropriate to use it.
Understand its purpose, make emergency financial decisions with confidence, and then replenish it when necessary.
Financial resilience isn’t just about having an emergency fund, but about maintaining and nurturing it for lasting security. After an emergency, it’s vital to rebuild your fund so that it’s ready for you the next time you need to use it.
This may require you to temporarily adjust your budget to refill your savings without guilt. For a few months after an emergency expense, pad some extra savings into your budget where you’re able.
This is only necessary for as long as it takes to get your account back up to your savings goal number. Once your fund is replenished you can re-adjust your budget.
Start where you are today and contribute as much as you can monthly to your emergency fund. Even if that’s just a few dollars a month at the beginning. Then keep building.
Be strategic in how you build with a high-interest account like the Sequin checking account. Become a Sequin member today and arm yourself with financial tools, education, and an account where your funds grow for you.
Your peace of mind to weather an unexpected emergency will thank you.
Opinions expressed here are author's alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities. The content on this page is accurate as of the posting date however since then some of the offers may have expired. Please see the bank's website for the most current credit card offers.