A shocking 69% of Americans have under $1,000 in savings, according to a 2019 GOBankingRates survey. That lack of emergency funds leaves people ill-prepared for financial emergencies.
Right now, many people are experiencing tremendous income insecurity because the coronavirus pandemic was declared a worldwide pandemic in March 2020. Many people have lost jobs, been furloughed or taken pay cuts as a result.
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To make sure you’re financially covered in situations as extreme as this or for even less extreme situations like if you need to make a home repair, it’s a good idea to have a comfortable savings account that’s earmarked for emergencies. To help you reach this goal, follow this step-by-step guide to create an emergency fund.
Last updated: July 12, 2021
Plan For 3 to 6 Months of Savings
Whether you’re just starting to save money now or you’ve been saving for some time, consider setting a minimum goal of three to six months’ worth of emergency funds to cover as many expenses as possible. From mortgage or rent to food and utilities, your monthly expenses add up, and it takes time to build up that extra cash.
Assess Your Spending
You can’t start saving until you know how much money you spend and, more importantly, what you spend it on. Write down your monthly income, then list everything on which you spend money during the month. Include essential recurring expenses like your mortgage or rent payment and child care.
Don’t forget the fun stuff — like how much goes toward eating out, catching the latest movie or keeping up with the latest fashion trend. Optional items and impulse buys are prime spots from which you can divert money into your rainy day fund.
Use an Interest- or Dividend-Bearing Account for Your Savings
Emergency cash should be liquid in case you need to access it. Don’t put the money at risk because the possibility of losing it negates the purpose of building up a reliable emergency money source.
You won’t want to put your emergency savings in the stock market, but instead, put the money in a high-yield, interest- or dividend-bearing account, and watch your money grow safely.
Make a Budget
You can’t save money if you don’t control your spending and free up enough cash to divert to your emergency fund. If you’re asking yourself how to save money on a tight budget, the answer starts with a review of your income and cutting unnecessary expenses.
Go through your list of expenses and ask yourself:
- Do you need all the extra movie channels on your television streaming package?
- Could you live without that fancy latte a couple of days a week?
- Are you allowing room for occasional necessary expenses like new car tires?
Set Reasonable Goals
Financial goals are different for everyone. If you have a mortgage, kids, auto loans or even a reasonably fun social life, saving $10,000 sounds about as feasible as climbing Mt. Everest. But here’s the thing: No one climbs Mount Everest overnight. They get to Base Camp, then Camp I and so on. Weeks later, they’re on the summit.
Conquering your emergency fund goal should work the same way. Make $10,000 your ultimate goal, and strive to reach it in smaller steps, even if you’re just saving $20 a month to start.
Track Everything and Pay With Cash
Once you’ve come up with a reasonable budget, use mobile banking and budgeting apps to keep yourself on track.
It’s easy to overspend when you whip out your credit card because you don’t see the total damages until your statement arrives at the end of the month. Your budget provides a list of expenses with which to track your outflow. When you visit a store to purchase budgeted items, bring just enough cash for the planned purchase. This keeps you on budget and preserves your emergency cash stash by eliminating the ability to add just a few more items.
Pay Yourself Like a Bill
Treat your emergency fund contribution with the same respect that you handle your housing or utility payments. Take things out of your hands entirely and ensure that money from every paycheck goes into the fund by setting up direct deposit.
Many employers can split your deposit between two accounts so the proper amount goes into your rainy day fund, with the rest going into the account you use to pay the bills. This eliminates the temptation to skip that fund contribution “just this once.” It also helps you save money fast as opposed to adding to your fund sporadically.
And Automate Other Savings To Yourself
If you have to stop and think about saving money, you are probably far less likely to save it than if you automate your savings deduction.
If you can’t have some of your paycheck automatically deposited to your savings account, then you should know that most banks make it easy to set up ongoing transfers online that you can modify as needed. Once you automate it, you can learn to budget around that money while growing your savings.
Invest In Long-Term CDs
Investing money can be risky, particularly if that money is invested in funds that rise and fall with the stock market. Since COVID-19 struck, the U.S. stock market has taken a significant hit. However, putting your money into something like a certificate of deposit (CD), which has a fixed interest rate for a set period of time, is a sensible and risk-free way to save money so long as you don’t need immediate access to it.
Don’t Delay Your Emergency Fund To Pay Off Credit Card Debt Instead
Saving money in an emergency fund and paying off credit card debt are two financial strategies that can peacefully coexist. Don’t delay starting your rainy day fund while paying off your credit cards.
Instead, use a strategy like “snowballing.” Pay off the card with the smallest balance first, then add that money to the payment for the next-smallest balance until all of your cards are paid in full, or channel as much money as possible to the card with the highest interest rate.
Pay Off Credit Card Debt
It may sound counter-intuitive to save money by spending it but it actually makes perfect sense; when you carry credit card debt, you’re also racking up interest, which is money you’ll never get back. Instead, as you also work on your savings, pay off your debt. Once the debt is gone, not only will you have back your monthly payments, but you’ll also be saving on interest.
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After You Pay Off Debt, Add That Money Saved To Your Fund Every Month
If you’re able to pay off credit cards and keep them at a zero balance, put what you would have paid on them into your emergency fund instead. You won’t miss that money since it’s already figured into the budget.
Tap Other Emergency Services First When Needing Money
Sometimes, you face emergencies for which outside assistance is available. For example, the Federal Emergency Management Agency assisted victims of Hurricanes Irma and Harvey. This type of aid varies and might come from nonprofits, like help from the Red Cross in case of a house fire.
You can always Google for the type of assistance you need, whether it’s related to food, housing, medical or something else.
Save Your Raise
While few people may be seeing raises right now in the time of the pandemic, things will eventually go back to normal. If you get a raise, consider investing a significant portion of it in an emergency fund instead of adapting to the increase. A CNBC finance expert recommends you save at least 33% of your raise. As an example, if your raise equals $5,000, you’d save $1,650 of it.
Save Any Other Unexpected Money
Life has a not-so-funny way of offering up more unexpected expenses — car breakdowns, lost cellphones, teenagers — than unexpected income. But there is the occasional greenback-filled birthday card or bonus from work. When those come along, put as much as possible right into your emergency fund.
You don’t have to squirrel it all away, but adding the majority to your savings can help you build your rainy day fund quickly.
Don’t Casually Tap Into Your Rainy Day Fund
Your emergency savings fund is just that — savings for emergencies. It’s important that you leave it alone until you’re really in an emergency and don’t have any smart alternatives.
It might be tempting to tap into it for a nice vacation or another big life event, but you’ll be happy you didn’t when a real emergency hits.
Take Out a Loan for Nonemergency Expenses
When your old clunker dies, it feels like an emergency. But, it’s better to take out a car loan for the replacement vehicle — especially if you can find a low-interest loan. The same goes for home repairs or upgrades — which could be financed with a home equity loan — and college expenses that are eligible for a low-interest student loan.
However, when you’re looking for emergency loans, bad credit might lead you to consider options like payday loans. Beware of taking out these high-interest emergency cash loans, as they might have interest rates of almost 400% when calculated annually. Avoid these emergency loans, and stick to options with reasonable interest rates.
Don’t Dip Into Your Fund Because You Lost Your Job
Losing your job probably seems like the right time to dip into your emergency fund. But think twice before you do. You should first consider applying for unemployment. You can also see about picking up some gig work while looking and applying for other jobs.
Sign Up For Automatic Increases in Contributions
Whether you contribute to a savings account or a 401(k), some of these allow for what is known as an automatic increase, which takes place annually. If you sign up for this, every year the amount that is deducted from your paycheck or checking account and put toward savings will increase, often by a very small amount, such as 1% but that amount adds up over time.
Take Coupons Seriously
Coupons may save you more money than you think. If you tend to ignore the flyers that come in your newspaper for sales and coupon offers or don’t take advantage of discounts, you are missing out on opportunities to save money that you could put into your emergency fund. Take advantage of coupon apps and sites, such as Ibotta and Groupon, as well.
Take a Temporary Gig
While few people have the luxury of taking on a second job to earn more money and many are striving to hold onto the ones they have in the COVID-19 crisis, the gig economy is still very much alive. Work like this often allows workers to set their own schedule, pick and choose gigs that work for them and other flexibility that might enable workers to earn a little extra rainy day cash. Of course, you have to remember to put that extra money aside.
Seek To Sell
Whether you’re planning to pad your emergency fund for the future or are in a pinch right now due to COVID-19, consider what items you might have on hand that you could sell for quick cash. From your old car that you aren’t using to clothing in good condition to electronics and appliances, many people prefer to purchase used items for their price point. Some places to sell include Craigslist, Facebook Marketplace, Fulfillment by Amazon and eBay.
Revise Your Budget
Every so often, you should revise your budget because extra money you could be saving for an emergency may be sitting in plain sight in your current expenditures. Revising your budget to cut back on expenses can free up that money to be put away for a time when you’ll need it most. You may not think you can cut corners, but there are always places to look, from cable and internet packages to eating out.
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