How to Build an Emergency Fund
If you had to pay an unexpected $400 bill today, would you be able to without reaching for a credit card or asking for a loan? If your answer is no, you’re not alone. And you need to keep reading this blog.
A large proportion of working Americans are in the same boat, lacking liquidity or cash reserves, amid an overall feeling that they’re drowning in bills.
The fifth edition of the Federal Reserve’s Survey of Household Economics & Decision Making (SHED) was released last week. Once again it asked whether people would be able to pay for an unexpected $400 expense in cash or the equivalent of cash. Forty percent said they wouldn’t have enough. This was a slightly improvement from the 49 percent in 2013.
According to a LendingTree report in 2017, four in five Americans are in the red—and a quarter of those in debt do not have a plan to pay it off.
An emergency fund is your essential starting point. There are many reasons why this is so highly recommended by financial experts: If an unexpected medical bill, car repair, or appliance disaster arises, you’re able to pay for that cost without adding further to your debt. This will help you then shore up even more helpful forms of income protection, such as disability insurance.
Here’s how to build your emergency fund:
1. Set a goal
Goals are incredibly important in financial planning. A vague wish won’t get you anywhere. You need to make yourself accountable. Finance expert Dave Ramsey advises that people set the goal of saving a $1,000 emergency fund as soon as possible. You can also work out what three to six months of living expenses would be and aim to put that away.
2. Plan a place for the fund
You don’t want it hanging out murkily in the midst of your active checking account.
A high yield savings account is a great place to store the money. You need to be able to access it should an emergency arise, but not have it mixing in with your regular money. At the very least, put it in a savings account.
3. Build a budget
In order to make this work, you need transparency into your daily habits, and where you may be losing money without realizing it. By building a budget (and there are a whole host of apps to help you do that) you can track your expenses in razor detail. Spend some time with your budget, and study your income and outgoings.
4. Lower your expenses
- Cut back on unnecessary items: Do you need to eat out at restaurants? Could you take a packed lunch to work more regularly? Do you really need your cable TV subscription? Go through your budget and identify areas you could cut back on costs. Everything counts. Even if it seems like a tiny action, those will add up over time.
- Renegotiate your bills: Have you asked your various providers if they can provide you with better rates? It’s definitely worth the time to ask. From your internet bill to credit card interest rates, there are a whole host of items you can try to negotiate, so pick up the phone and have a conversation.
- Add all of these savings into your emergency fund: Make a regular habit of shifting those extra dollars into your savings account.
5. Increase your income
In addition to cutting things back, how can you expand your income?
- Save the raise: If you get a raise, don’t just expand your lifestyle and indulge in more treats for yourself. Act as if nothing happened. Stick to your previous budget and siphon all that extra cash into your fund. By doing this, you’ll really be able to build up that nest egg quickly.
- Sell something: Do you have a guitar lying in your basement that’s gathering dust? Throw it up on eBay. Do an inventory of your possessions that others may like, and sell off what you don’t need.
- Use that tax refund: If you get a tax refund or a gift, rather than immediately splurging it, apply your inner-strength and shift it into your savings.
- Find a side hustle: You may already be working full time, but is there another job you could take on to help bring in some extra resources? Maybe it’s walking dogs, working as a tutor, or even starting a blog that has money-making potential.
6. Automate everything
Make sure all your bills get paid on time by automating everything. If your budget allows you to shift a certain amount of money into your savings each month, automate this too. You can even think about setting up a separate “Bill Pay” account, and automatically move that money over as soon as each paycheck comes in (more on how to do that here.)
Once you put these steps into place, you’ll be moving in the right direction. The wonderful thing about saving money is that once you start to actually do it and see that nest egg start to form, you’ll become inspired and spurred on by your success. This activates a virtuous cycle of change.