Why most people don’t have an emergency fund, and how to build one painlessly
Why most people don’t have an emergency fund, and how to build one painlessly
Building an emergency fund might not sound glamorous, but trust us, it’s a total game-changer. Think of it as your financial safety net that protects you from unexpected financial surprises. Whether it’s a broken phone, a sudden car repair, or even a medical expense, having an emergency fund can provide peace of mind and help you navigate life’s ups and downs. We will walk you through the what, why, and how of building an emergency fund.
What is an emergency fund and why is having one necessary?
An emergency fund is a special savings stash that is specifically set aside for unplanned, or emergency, expenses, big or small. This includes medical bills, car repairs, home repairs, or even loss of income. Anything you weren’t expecting can be covered by this fund, as long as it’s something that needs to be done and not just something you want to buy.
Think about what would happen if you didn’t have an emergency fund, and your car breaks down. Now, you have a large bill to pay, and no money to cover it! This is where an emergency fund would come in handy! Without an emergency fund, an unexpected expense could set you back and increase your debt. The effects can be long-lasting. You might struggle to recover from the financial shock which could lead to less savings and higher debt. You may resort to using credit cards to cover expenses. Some people even pull money from their retirement accounts to cover these costs. Which isn’t the best idea, as you are taking away from your future.
How much money should I have in my emergency fund?
The rule of thumb for an emergency fund is to have 3-6 months of your essential living expenses saved. This includes your shelter (mortgage or rent), utilities (water, electricity, etc.), food, and transportation (gas included). We know that sounds like a lot, but you don’t have to set it aside all at once. You can slowly build your emergency fund. To begin, the first step is to establish a savings goal, determining the amount you want and setting a specific target date to achieve it. Setting a clear goal boosts outcomes and yields better results. You can even write it down and put it somewhere you can see it every day. This will improve your focus and help you gain momentum toward reaching your goal.
Overwhelmed by how much you need to save? Then, start small! Set a small goal, such as $1,000, first. Once you’ve reached that goal, set another one! You can even reward yourself once you’ve met each of your milestone goals!
How can I build my emergency fund?
The best way to build your emergency fund is to build savings into your budget. There are multiple ways to do this. First, you can look at your budget and see where you can trim down some expenses. Take the money that you save from trimming your expenses and add it to your emergency fund instead. You can also decide to set a certain percentage or a set amount of your monthly pay aside to add to your emergency fund. If you go the second route, have the money automatically transferred to reduce the temptation of frivolous spending.
Do you ever receive bonuses at work or get refunds on your tax return? What if we told you that it’s better to add this money to your emergency fund instead of spending it on something frivolous and fun? While it might be exciting to spend a big chunk of money on something fun, it gives you peace of mind to have money in your emergency fund! And what’s better than that?!
If you’re worried about not building your emergency fund as quickly as possible, you can find ways to increase your earnings. Some ways you can increase your earnings are to find a part-time job: do ride sharing like Uber or Lyft, provide a service (such as lawn mowing, leaf raking, or snow shoveling), or find freelance gigs in your area of expertise.
Where should I keep my emergency savings fund?
You should put your emergency fund in an easily accessible account where you don’t have to wait to withdraw it. It’s not a great idea to tie up your emergency fund in the stock market or real estate. It might take some time to pull that money out, and emergencies often require you to have the money quickly.
You also want to make sure that your emergency fund account is an interest-bearing savings account. You might as well make a little more money from the interest when the money is sitting there waiting to be used, right?
If you think you might be tempted to spend your emergency fund, don’t connect it to your checking account. That makes it easier to spend your emergency funds on something that’s not an emergency. It’s also a good idea to set up a direct transfer to avoid any spending temptations.
Setting up an emergency fund is a crucial step towards financial security and peace of mind. By putting aside a little money regularly, you’re creating a safety net that can protect you from unexpected expenses and help you weather any storms that come your way. Remember, it’s never too late to start, and even small contributions can add up over time. So, take that first step today and make your financial future a little brighter. Your future self will thank you!
