5 Steps to Building an Emergency Fund

A study by the Federal Reserve revealed that only 64% of adults surveyed had enough funds to cover a $400 emergency.

Imagine what would happen if a family member fell ill and you didn’t have the money to cover their hospitalization or medication. Or if you faced an emergency like a storm or hurricane, without funds to cope with it. The truth is, many people live, as we say, “paycheck to paycheck.”

Faced with these emergencies, some people resort to charging expenses to a credit card, taking out a loan, selling valuable possessions, or withdrawing money from their 401(k) plan, which incurs taxes and penalties. However, the best strategy is to maintain an emergency fund to manage these unexpected events. This fund is reserved to cover unforeseen expenses or critical situations.

An emergency fund serves as a lifeline that allows you to cover your expenses for three to six months. It ensures that, in the event of an emergency or job loss, you have the resources to pay for your basic needs.

Financial security in times of uncertainty

In addition to providing peace of mind, an emergency fund protects your financial future by preventing you from withdrawing money from your savings or retirement accounts. It is also crucial for taking calculated risks, such as changing jobs, starting a business, or moving, without constantly worrying about financial stability. An emergency fund acts as a cushion, allowing you to make important decisions with greater confidence and security, knowing that there is financial support in case of unforeseen events.

Steps to create an emergency fund

Experts recommend 5 steps to create your emergency fund:

• Step 1: Set your goal. Begin by saving three months’ worth of salary, but adjust based on your work and family circumstances.
• Step 2: Automate your savings. Set up a biweekly or monthly automatic transfer to an account dedicated solely to these savings. Avoid accessing that account.
• Step 3: Save bonuses and extra income. Allocate a portion of your commissions, productivity bonuses, and Christmas bonuses to your emergency fund.
• Step 4: Review and adjust your fund. Do this regularly, particularly after significant changes in your life or finances, like a salary increase or a shift in your monthly expenses.
• Step 5: Reserve it for genuine emergencies. Avoid using your emergency fund for impulse purchases or vacations. Keep it for critical situations only.

If you need financial advice, write to our experts at educacionretiro@popular.com.

Furthermore, if you have a 401(k) plan with Popular, TeleBanco Popular® representatives can assist you in accessing your digital 401(k) account at popular.com/401k and offer guidance on how to navigate it. Please call us at 787-724-3657 (double press option 2).

¹ 2020 Household Economic Well-Being Report, Federal Reserve, May 2021.

The information and general descriptions found in this article are designed to help you understand some of the factors you should generally consider when evaluating financial planning strategy. Any description included is for informational and educational purposes and for your independent consideration only; it is not to be regarded or viewed as advice or as a suggestion to take (or refrain from taking) any particular action. By providing this information, we assume that you can evaluate this information, and the general descriptions found here to exercise your independent judgment.

Banco Popular de Puerto Rico, its subsidiaries and/or affiliates are not engaged in rendering legal, accounting or tax advice. If legal, accounting, or tax advice are required, you should seek the services of a competent professional.