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The main purpose of an automotive emergency fund is to cover unexpected car repairs. That way, you don’t need to borrow loans at higher rates or dip into other savings. Plus, you reduce the stress that comes with a car emergency.
According to an AAA study, about 64 million drivers can’t afford emergency car repairs without borrowing. But being prepared can help you avoid such situations.
Also, you can invest in the best extended car warranties. Shop for companies that offer flexible payment options and coverages. For example, you can use the CarShield reviews to find a reliable used warranty company.
That said, here is how to create an automotive emergency fund.
Start Small
According to AAA, car maintenance takes about $500-$600 every year. So it is recommended to save about $50 every month, which can add up to $600 annual savings.
Saving seems like a daunting task at first. Plus, saving for your car may affect your retirement benefits or other financial goals. As a result, most drivers quit before they even start saving.
It takes a while to build savings, so you don’t need to start big. Instead, you can start by having smaller saving goals before moving to your larger ones. For example, say you were planning to save $800 per year, you can go as low as $480 and work your way from there. That way, you can save $40 every month.
Remember, if you have a well-maintained car, you reduce the frequency of car repairs. That means you can go for a while before tapping into your emergency funds.
So, don’t be discouraged when building up to the final car emergency fund goal.
Use a Separate Emergency Fund
Most experts advise that you save about six months of living expenses for your main emergency fund. So, it is advisable to have a different account for your car repair emergency savings. Separate accounts mean you use each emergency fund for its primary purpose.
For example, using your main emergency funds for car repairs can affect other household emergencies like a job loss. The same applies if you use car repair savings for other household expenses.
Where to Put Your Car Repair Savings
You need to access your funds with ease. So, you need a savings account with high benefits without impeding your access.
The best way to save is using a high-yield savings account. Shop around for various savings accounts from different banks. The best account should offer higher interest rates and no minimum balance. This is in case your emergency requires huge withdrawals.
Alternatively, you can use a money market account. These accounts have bigger minimum balance requirements, but they also offer higher returns and no penalties for withdrawing.
Another option to use is a certificate of deposits of CDs. This option gives you a specific interest rate for a specified period. You can opt for a period of as short as a month or longer periods of up to seven years. Longer periods have higher interest rates.
But CDs lock up your saving accounts, and you can’t withdraw for a specified period. If you make any withdrawals before this, you face a penalty.
Lastly, you can opt for online saving accounts or apps.
Automate Your Deposits
It is important to automate your car repair emergency fund so that your savings go directly to your account.
If you treat your savings like your bills, you can make this step easier. Try to deposit into your savings account every month how you pay for your bills. That way, you make priorities where your money goes.
Another benefit of automatic deposits is you don’t have to remember to save every month. Plus, you won’t spend it on other things. Sometimes, it’s easy to spend money if you have access to it.
Also, since you factored in what you can save on your car, you won’t affect other expenses.
Build Up Your Savings
Once you have set everything in motion, you can watch your savings grow. But it won’t hurt if you add any extra cash into your car repair emergency fund. So any rebates, bonuses, or cash gifts can make an excellent addition to your savings.
Also, if you’ve completed your loan or credit card payments, you can funnel the amount you were paying to your savings. And the good part is that while you won’t dent your daily budget, you will increase your emergency fund.
Cut Expenses
It may be the umpteenth time you hear this, but cutting expenses helps a lot. Plus, it not only increases your savings, but it may also change your lifestyle.
There are several ways to save more and cut expenses:
- Don’t buy what you don’t need. So, if an expensive car, TV, or gaming console will dent your budget, avoid it.
- Eat at home to avoid expensive restaurant meals.
- Make a list every time you go shopping.
- Evaluate your memberships, contracts, and unnecessary monthly payments.
- Commute or walk whenever you can. It helps save on gas and maintain your car mileage.
Also, you can sell things you don’t need in your garage, basement, or storage lockers. This will earn you a few extra bucks now and then.
Remember to evaluate your savings plan regularly. This is a great way to know if your spending and saving plan is still achievable.
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