These last few years have been riddled with global financial difficulties. From the ongoing economic impact of the Covid-19 pandemic, to ongoing interest rate hikes from the Fed, to record-high inflation, to the economic consequences of the conflict in Ukraine. We are living in an era where global events have impacted each and every one of us financially, in one way or another.
It is therefore unsurprising that over half (53%) of Americans report that they do not have any emergency savings. In a recent survey by CNBC, it was reported that only 45% of Americans say that they have an emergency fund. This may be essential not just for economic shocks, but also the daily emergencies that may arise from having car repairs, household repairs or an expensive medical bill.
While it is understandable that many people do not feel that they are in a position to build a fund for emergency situations (such as sudden loss of income or medical expenses), having money available for emergencies is a vital aspect of an individual’s financial well-being. In fact, a common recommendation is that an individual should have a fund large enough to cover 3-6 months of expenses.
This may seem like an intimidating amount of money, especially for those who currently have zero emergency savings available to them. However, it is easier to start to build that fund than you may think, rather than having an emergency pop up and then having to rely on family members or urgent loans with bad credit which come at a high rate of interest. With this in mind, we have compiled a list of tips that may make building your emergency fund a little easier.
Begin with Small, Regular Contributions
It’s wise to initially make small, but regular, contributions to the fund. By keeping the contributions small, you won’t become stressed about the fund’s impact on your regular cash flow. If you start putting aside too much too quickly, you may feel the pinch on your regular outgoings and give up on the fund all together.
Choose an amount and commit to saving it at regular intervals, whether that is weekly, monthly, or whenever you receive a paycheck. By keeping your contributions small and regular, you will find that saving becomes a manageable habit, rather than an intolerable struggle.
It’s always wise, when beginning to save, to find ways to cut back on your monthly expenses. Perhaps you could buy less takeaway coffees per week, or curb that takeout habit. There are always luxuries that can be foregone when looking to save.
Automate your Savings
The best way to save money is to not have it immediately available to you in the first place. By this, we mean that a good way to build up an emergency fund is to set up a separate account for the fund and have the contribution amount deposited automatically (either by your bank or by your employer).
Further, for the fund, it is best to use a type of account that is not easily accessible. So choose a savings account rather than a checking account. When building the fund, it is also best not to continually check on the account balance. This may discourage you as the growth may seem too small. It is best to set up the account, automate the contribution, and forget about it until the fund is necessary.
Don’t Increase Monthly Spending
It is always good to be mindful of your monthly expenses, but it is even more important once you have set up an emergency fund with automatic payments. Setting up a fund can lull you into a false sense of security so that you believe that you are covered for all possible expenses. This can lead to your spending habits rising again.
For example, if you have foregone a monthly luxury expenditure for a few months in order to build up the fund, don’t then replace it with another luxury a few months later. If you do so, you haven’t really saved at all!
It’s important to strike a balance between enjoying life while also being mindful of the importance of having a robust emergency fund. The peace of mind generated from having such a fund will make life more enjoyable in the long-term.