Living paycheck-to-paycheck sucks. When any little thing happens it can send you into a whirlwind of panic looking for what you can sell, who you can borrow money from (again), or how you will get by until this storm passes. You get through that and then something else comes up. Sound familiar?
Life happens and sometimes unexpected expenses just come out of nowhere. Whether it’s a sudden medical emergency, an unforeseen job loss, or a major car repair, having even a small emergency savings can take so much pressure off and reduce your stress significantly because those little bumps don’t get to you anymore.
Why Emergency Savings Matters
1) Peace of Mind: Having an emergency fund offers peace of mind, knowing that you have a financial cushion to fall back on during tough times.
2) Avoiding Debt: With cash in savings, you won’t have to rely on high-interest credit cards or loans, preventing you from sinking into debt.
3) Sustaining Financial Goals: Emergency savings protect your long-term financial goals, such as retirement or purchasing a home, because you won’t have to dip into those long-term accounts when something unexpected pops up.
How to Build an Emergency Savings Fund
1) Start Small and Build Your Confidence: If you don’t have an emergency fund yet, now is a great time to start! Open a savings account and begin with small, regular contributions. For example, $25 a paycheck, then bump it up to $35 the next check, and continue increasing it in small increments until you reach your savings goal.
You will build confidence in yourself by starting small, saving consistently, and keeping the money in your savings. You aren’t doing yourself any favors by putting $250 in savings but then you pull it next week because you forgot about that one bill.
2) Set a Goal: How much do you want to save for emergencies? Ideally, aim for three to six months’ worth of income. This should cover essential costs like rent/mortgage, utilities, groceries, and insurance.
3) Make it automatic: You will be most successful in saving if you make it easy and automatic. For example, check with your boss and see if your company lets you split your paycheck deposit into two accounts. Then you could have your savings amount go directly to your savings account and your spending money go to your checking.
If that’s not an option, perhaps you can set up automatic transfers with your bank on your paydays.
4) Cut the “Water” Expenses: In my previous post, I talk about “water” expenses which are those things you are spending money on that do not give you any value (subscriptions or memberships you don’t use for example). Review your spending habits and identify areas where you can cut back. Redirect the money you save from these reductions into your emergency fund.
5) Utilize Windfalls: If you receive unexpected bonuses, tax refunds, or monetary gifts, consider putting a portion of these windfalls into your emergency savings.
Keeping Your Emergency Savings Intact
1) Hands Off: Only use your emergency savings for genuine emergencies. Resist the temptation to dip into it for non-urgent purchases or vacations. Some banks let you “hide” an account from your homepage by going to your account settings. This keeps your account “out of sight, out of mind”. You could also consider keeping your savings account at a different bank than the one you regularly use to help you resist the temptation to use it unnecessarily.
2) Replenish After Use: If you do need to use your emergency fund, make it a priority to replenish it as soon as possible.
3) Reevaluate Regularly: As life circumstances change, review your emergency savings goals. For example, if you had a raise, does your savings need to increase so you still have 3 months worth of income saved?
Life is unpredictable, and having an emergency savings fund reduces your stress when those surprises come along. By prioritizing emergency savings, you can protect yourself from falling into debt, sustain your long-term financial goals, and achieve peace of mind. Remember, even small contributions can make a significant difference in the long run. Start building your emergency savings today and take control of your financial future.
Now is a great time to log into your bank and schedule automatic transfers or email your HR department to see about an auto deposit into savings!