03 Jun 8 Steps to Quickly Build Emergency Savings
There’s one thing COVID-19 reminded all of us: the necessity of having emergency savings.
It’s shown us it’s not just important–it’s VITAL. It has proven that anything can happen, and, if we aren’t prepared, it’s not a pretty picture.
If you find it hard to save, you’re not alone. According to the Federal Reserve, 44% of Americans said they couldn’t come up with $400 for an emergency.
Whether you have zero saved or need to up your savings game, keep reading for 8 steps on how to quickly build emergency savings.
Why Is Building an Emergency Savings Important?
Emergencies will inevitably happen. Whether it’s a sudden home repair, a medical expense, job loss, or caring for aging parents–unexpected costs come up.
It’s not IF, it’s WHEN. So, it’s important to be prepared.
Emergency savings are a form of protection and could mean the difference between a small financial hiccup and complete disaster.
- It gives you peace of mind. Emergencies are already stressful situations. A lack of financial planning enhances this stress, especially if it has drastic results like losing your home or having your car repossessed. Having a savings plan in place gives you security and peace of mind knowing you can take care of yourself and your family without burdening others or going into debt to cover unexpected expenses
- It limits additional debt. A lack of an emergency fund could mean that, in the face of trouble, you have to use a credit card or take out a loan to quickly bail you out. Doing this only adds to the problem. Not only are you faced with new debt, but you also have to contend with interest rates that keep you weighed down.
- It’s a penalty-free solution. Saving monthly for an emergency fund doesn’t cost you when you need to use it. On the other hand, borrowing or withdrawing from your 401(k) can be costly. As a result of this virus, many people are turning to their retirement savings to cover their expenses. While penalties for early 401(k) withdrawals are waived for those who qualify for hardship withdrawals under the CARES Act, you will still have to pay ordinary income tax on the amount withdrawn.
- It provides security for the self-employed. If you’re an independent contractor, self-employed, or have work that does not allow you to claim unemployment benefits, having emergency savings is critical. Also, since you are paying your own health insurance, having extra money tucked away helps ease an emergency situation.
- It gives you freedom. An emergency fund gives you wiggle room when you decide to make life transitions. Leaving a relationship, finding a more suitable job, or starting your own business are all situations that benefit from having a built-in financial cushion.
How Much Should I Save in My Emergency Fund?
Ideally, your emergency fund should be 6 months’ worth of your living expenses. That way, if something happens, you’re covered.
So, if you need $3,000 a month to pay all of your expenses (rent, food, car, utilities, etc.), then your goal should be to save up $18,000 in an interest-bearing savings account.
Saving this much money may seem overwhelming, but if a certain amount is put away consistently, you will be surprised at how quickly you can grow your emergency fund.
Where Do I Save?
With interest rates near 0%, high-yield savings accounts aren’t what they once were. Still, they are a good option to quickly build emergency savings.
Since things are changing constantly on the global financial landscape, it is important to be informed and shop around.
High-Yield Accounts. Leaving money in a regular savings account where little interest is being made doesn’t make a lot of financial sense when trying to build an emergency fund. Instead, look for a high-yield savings account. Some banks offer between 1.30%-1.60% APY with varying minimum opening deposits. There are also money-saving apps like Digit and SmartyPig that make saving easy and accessible. Again, shop around for the best possible rates.
Credit Unions. Unlike traditional banks, credit unions operate as nonprofits–meaning they can offer higher interest rates on savings accounts. The inconvenience of having fewer locations and poorer online service can be a deterrent for some people. Regardless, as an emergency fund option, credit unions are worth consideration.
Tips: How to Your Start Your Emergency Fund
- Calculate how much you need to save. Make a list of all your expenses: rent, utilities, phone, food, health insurance, etc. Take your monthly total and multiply that by 6. This is the advisable goal for your emergency fund.
- Set a savings goal. Start with what you can commit to putting away each month. If your emergency fund goal is $18,000 (or 6 months of living expenses), you’d need to save $1,500/month if your goal is to save in 12 months. Is this doable? For many, it’s not.
Figure out what you can contribute. Perhaps saving 3 months’ worth of expenses is not as overwhelming. You want to push yourself to have that safety net, but no need to start with goals that feel overwhelming—especially if you have debt you are paying off also.
Even if it’s just making the habit of saving $100, $50, $20 a month, something is better than nothing. The long-term benefit is security and financial freedom.
- Add savings into your budget. Think with the end in mind. Look at your yearly savings goal and figure it into your budget. If you don’t, you’ll likely find that any extra cash is quickly spent. This is also a great opportunity to look at unnecessary expenses you can cut. Consider cutting online subscriptions and memberships that you don’t need. Eliminate the bottom two off your list, and put that money into your emergency fund.
- Pay yourself first. Paying yourself first means when you get paid, you pay into your savings before spending on anything else. Have your emergency fund be as important as paying rent, buying food, and keeping the utilities going.
- Automate your savings. To quickly build emergency savings, you need to make saving a habit. The easiest way to do this is to automate your savings. Having it out of your checking account can help avoid the temptation of spending it. Out of sight, out of mind!
- If you get extra cash–stash it. Receiving a large lump sum of money and saving it instead of spending is one of the best ways to quickly build emergency savings. Whether you receive a bonus, money for your birthday, or get money back from the IRS–if it’s extra cash, stash it.
- Review and assess quarterly. Check in once a quarter (or better, monthly) to see how much you are saving, and adjust if you need to add more. If you’re off track, don’t beat yourself up. Instead, review your spending habits and see where you got off course. Then, find expenses in your budget you can cut to make up for it.
8. Go ahead. Reward yourself. Rewarding yourself for reaching savings milestones can make saving money fun and even more satisfying.
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