According to a recent poll, two-thirds of Americans don’t have at least $1,000 saved up for an emergency. While that’s scary enough to think about, what’s even worse is that families who earn six figure salaries still claim they can’t manage to save up $1,000 in an emergency fund.
This tells me that this lack of saving is not just due to an income problem, it’s more likely a mindset problem and a spending problem as well.
The Benefit of an Emergency Fund
An emergency fund is one of the most basic and common financial aspects you will hear about. Unexpected expenses will occur, and there’s nothing you can do about it aside from preparing your finances by establishing an emergency fund.
Whether you’re paying off debt, have a low income, or don’t have too many risks, you still need an emergency fund because anything could happen whether it’s a health issue, emergency with your pet(s), car accident or repairs, job loss, or any random life event.
The benefits of having an emergency fund are clear:
- You don’t have to borrow from friends and family when you can’t afford an unexpected necessity
- Even worse, you don’t have to rack up debt using a credit card to cover large expenses you weren’t prepared for
- You’ll have peace-of-mind knowing that if anything ever did occur, you could handle the expense
How to Stop Putting Your Emergency Fund Off
I would love to hear some of the excuses from the two-thirds of Americans who failed to save up $1,000 for emergencies. Before I established my emergency fund, I used common excuses like: I don’t make enough money. I need to spend everything I earn to get by, I can’t afford to save because I’m too busy paying off debt, and my favorite one, It will take me forever to start saving up so much money.
I constantly kept putting off building my emergency fund and living paycheck to paycheck just barely getting by. Then, random expenses kept popping up one after another. My car needed new brakes or a brand new starter. My son got sick and needed expensive medication. Something in the house needed to be fixed ASAP. The list goes on and on.
I soon became tired of always being broke and living paycheck to paycheck with nothing to show for it so I made saving a priority and created space in my budget to build an emergency fund. I knew that if I wanted to be able to handle the unexpected without freaking out and using a credit card, I had to start saving something even though I was busy trying to pay off my debt.
I committed to saving up what I like to call a ‘baby emergency fund’ of $2,000 and I was able to reach my goal in just a few months. This year, my goal is to reach $5,000 and I hope to hit that target by July.
Don’t have anything in your savings account? Establishing a baby emergency fund is a great way to establish some type of financial cushion for yourself when you truly need it.
In order to establish your baby emergency fund and start growing it quickly, you need to follow these steps.
Determine How Much You Need
Financial experts offer a wide range of advice when it comes to determining how much to save in your emergency fund and suggest everything from $500 to a year’s worth of expenses. Ultimately though, the choice is up to you. If you are committed to paying off debt, have a low amount of monthly expenses or earn a moderate salary, I’d recommend getting started with a baby emergency fund of anywhere from $1,000-4,000.
This may not cover 6-months of your household expenses, but you may not need that much support at this time. Write out a bare bones budget to determine how much you need to get by each month if you suddenly lost your income and needed to dip into savings.
While my monthly expenses, total at least $1600-1800, if I really needed to cut back, I know I could live comfortably on $1000 per month, so a baby emergency fund would actually keep me comfortable for a least a month or two until I figure out my next step.
Other factors you might want to consider include whether you are single or married, if you have kids, and if you are self employed or have a traditional employer because these will all play a role in deciding how much you should set aside.
Choose Your Strategy
Once you know how much you want to save, you’ll need to develop a strategy to see how you will get there within a year’s time. I recommend hitting your baby emergency fund goal within a year or less because the average person start to lose motivation and momentum by that time. Plus, you’ll want to meet your goal ASAP because unexpected expenses don’t wait until the time is right to show up.
Divide your savings goal by 9-12 months to determine how much you need to set aside in a high-yield savings account each month. If your goal is $3,000 and you want to reach it in 10 months or less, you’ll need to set aside a minimum of $300 per month.
The best way to prioritize saving is to set up automatic withdrawals from your checking account to your savings account so you don’t have to worry about spending the money. You can also do a 52-week savings challenge to make it fun, or incorporate extra cash you receive like work bonuses, gifts, and your tax refund.
Cut Your Expenses
If you have extra money available each month to contribute to your baby emergency fund, it shouldn’t be a problem to reach your goal. But if you don’t, you’ll have to make some adjustments to your expenses.
Think of categories in your budget that you can cut or reduce. Start by cutting your variable leisure expenses like dining out, entertainment, your cell phone bill, impulse purchases, your grocery budget if you always tend to through extra food in the cart, and so on. If you have a hard time parting with any of your variable expenses, set a goal to cut at least $15 or more off each of them and use the savings you generate to put toward your emergency fund.
Give Yourself an Income Boost
If cutting your expenses still can’t help you reach your target goal in time, consider ways to earn extra money even if it’s temporary. You can get a second job, mow lawns in the neighborhood or babysit a few times each month to bring in extra money.
Take whatever you earn and put it directly toward your baby emergency fund. Once you reach your goal, you can slow down and go back to your normal routine with peace-of-mind knowing that you have a sustainable financial backup should anything in your life go wrong.
Do you have an emergency fund? If so, how did you establish it? If not, what is holding you back and how much do you wish to save?
Chonce is a freelance writer who’s obsessed with frugality and passionate about helping others increase their savings rate, eliminate debt, and work toward financial stability. She chronicles her journey to becoming debt-free on her blog, mydebtepiphany.com.
