Author: Fundamental Advisory and Consulting, LLC
According to Bankrate.com, 22% of those surveyed have no emergency savings, and 30% don’t have enough to cover 3 months’ worth of expenses.[1] Add it all up, and it means that over half the people surveyed would be in serious financial trouble in the event of job loss or a major medical bill – a finding that resonates as being representative of the American public at large.
If you feel like it’s getting harder and harder to keep up with the cost of living, and the thought of building a strong emergency fund feels hopeless, you’re not alone.
Creating a strong emergency fund isn’t something that just happens. It’s the destination of a journey that begins right now.
Start with understanding how you spend your money. Look at your recurring expenses, such as subscriptions to streaming services, car payments, and your rent or mortgage payment. Categorize these into things that you can’t change, things that you can reduce, and things you can eliminate. Then look at other expenses that are more variable, such as eating out or going to the movies, and try to figure out how often you incur these and a rough range of what you spend when you do. Once you understand how this money is being spent, figure out whether you can reduce any of this spending – but be honest with yourself. Only commit to what you can honestly achieve.
Once you have a good idea of how much money you typically have left over, and how much additional money you could have by reducing spending, it’s time to get that fund started. Don’t obsess about how much money you have available to start with. The most important thing here is beginning to create your fund, and then adding to it consistently. The best way to ensure this happens is to set up a savings account with the sole purpose of serving as your emergency fund.
If you use direct deposit, you can update the information on file with your employer so that your specified contribution to your emergency fund is automatically deposited every pay period. For those who are self-employed, or those who aren’t paid via direct deposit, consider setting up an automatic transfer each month from your checking account into your savings account.
Now comes the hard part: don’t touch that money unless you really need it.
If you’re wondering whether you should tap that money, the answer is typically going to be no. A good test is that if you find yourself saying, “I’ll pay it right back,” then it isn’t really an emergency worth tapping the fund for unless you have absolutely no other way to pay the expense in question. The fund doesn’t exist to help you avoid putting a single expense on a credit card, after all.
Emergencies tend to be sudden and unexpected. Get started with building your emergency fund today so that you’ll be ready.