The Importance Of An Emergency Fund And How To Fund It
Updated: Aug 7, 2020
According to a 2019 gobankingrates survey, 69% of Americans have under $1,000 in savings. This lack of emergency savings leaves people unprepared for financial emergencies such as job loss, pay cuts and large unexpected medical, home, and vehicle expenses.
Without savings in these situations, one might resort to withdrawing money from a 401K or take on high-interest consumer debt resulting in interest, penalties, taxes, and loss of growth for your retirement funds which may require you to retire later and/or downsize your planned retirement lifestyle.
An emergency savings fund is a critical piece of financial security. It reduces stress by helping you prepare for future unknowns and helping you avoid the negative impacts from additional high-interest debt and withdrawals from your retirement account when faced with financial emergencies.
Here are some tips to help you create your emergency savings fund and reach your savings goals:
-SET A GOAL TO SAVE AT LEAST 3 MONTHS OF EXPENSES
Your emergency savings should be able to cover all of your SURVIVE expenses for at least 3 months including shelter, food, utilities, transportation, childcare, etc.
-ASSESS YOUR CURRENT SPENDING
It is difficult to save if you are unsure of what you spend. Write down everything you spend in a month. Make note of SURVIVE expenses (shelter, food, utilities, transportation, etc) and THRIVE expenses (life-enhancing, fun, optional expenses like dining out, daily coffee, or entertainment). The money you currently spend on THRIVE expenses would be a great place to start redirecting money into your emergency savings.
-MAKE A BUDGET AND USE IT
This is perfect to do after you have assessed your current spending. “A budget is telling your money where to go instead of wondering where it went.” John C Maxwell. Look for “money leaks” you can plug (is there anything you can coupon, cut or cancel) and “money opportunities” you can take advantage of (do you have time or resources to create more income, i.e. freelancing, tutoring, etc.)
-SAVE A LEAST A PORTION OF YOUR UNEXPECTED MONEY
This can come in many forms: gifts, tax refunds, rebates, work bonuses, etc and is a great way to boost your savings.
-BUILD YOUR FUND FASTER BY SELLING ITEMS YOU NO LONGER NEED
You may have items sitting around your home that you do not use anymore that could be sold through a good old fashioned yard sale, FaceBook MarketPlace, Craigslist, etc.
-SAVE AT LEAST A PORTION YOUR RAISES
Saving your raises can help you avoid lifestyle creep (increasing consumption of non-essential items when your standard of living increases) and help you reach your savings goals faster.
-USE A LIQUID ACCOUNT THAT PROVIDES INTEREST OR DIVIDENDS
You want to have easy access to your money without risk. There are many great options for higher yield savings or money market accounts. I currently use a Capital One’s 360 account.
-MAKE MONTHLY SAVINGS AUTOMATIC
It can be easier to save when you do not have to think about it each month and there is less temptation to skip a month. Most employers utilize direct deposit and allow your paycheck to be allocated between multiple accounts. Allocate a specific amount each month to be deposited directly into your savings. If you are self-employed or do not have this option through your employer most banks can set up an automatic monthly transfer.
An emergency savings fund is essential for your financial health and well-being. If you are ready to take charge of your financial health contact me today for a free Financial Freedom Breakthrough Session.