- Less than half of all the adults in America have the funds readily available to cover a $1,000 expense.
- Automating your savings is one of the best ways to build an emergency fund.
- Start small with a goal of $500 or $1,000, then try to save 3 to 6 months’ worth of expenses.
An emergency fund is an essential resource that every one of us should have, yet a distressingly small percentage of people have the cash to cover even a small emergency. Recent surveys suggest fewer than 50% of people have $1,000 on-hand to pay for something like a car repair or a medical bill. Instead, people will often turn to credit cards or loans.
Having to borrow money in an emergency can have a big impact on your long-term financial health, so having an emergency fund is invaluable.
Fears of an oncoming recession
One reason to build an emergency fund as soon as possible is that many economists fear a recession is on the horizon. Inflation is high and the Fed is committed to raising interest rates, whether or not they can create a soft landing.
During a recession, people can lose their jobs or other sources of income and loans can become more expensive, making an emergency fund even more important.
How much to save?
One of the first questions people have about emergency funds is how much they should save. It’s best to start with small, achievable goals. Saving $500 or $1,000 is a good thing to aim for at first.
Once you’ve done that, most people would recommend paying down high-interest debt before saving more. That means paying off your credit card balances and similar debts before you put extra cash into your fund. The savings on interest will be worth more than the additional cash in your savings account.
A popular rule of thumb is to save between three and six months’ worth of expenses. If you spend $2,500 a month, that means setting aside between $7,500 and $15,000.
That might seem like daunting task. However, it also puts you in a strong financial position to deal with anything from an unexpected bill to losing your job.
How to save money fast
Once you’ve decided how much you want to save, it’s time to get saving. This can be the hardest part, but with a few tips, you can start stashing some cash.
Track your spending and design a budget
The first thing you should do is figure out how much money you’re spending each month and where you’re spending that money. Understanding your earnings and outflows of cash will help you save money in the long run.
By closely tracking your spending, you might learn things that surprise you. For example, you could find that you spend far more than expected on things that don’t make you happy. Try to cut down your spending on things that don’t contribute positively to your life. A common place to look for excess spending is recurring subscriptions. Conversely, you might find you habitually spend on things that you can easily make at home for a fraction of the price, like a two-coffee-a-day habit at Starbucks.
If you can reduce your spending, you can divert that extra income toward saving. This can be difficult if you’re living paycheck-to-paycheck, but even saving $5 or $10 here and there is a good start.
Automate your savings
Once you know how much you make and spend each month, you can use that information to start saving. If you make $4,000 a month and spend $3,600, you can put $400 into your emergency fund each month.
The best thing you can do to make sure you actually save that money is to make it automatic. The less you think about saving, the less likely you are to overspend or decide to skip a month.
One strategy is to set up direct deposits into your savings account. Many employers will let you split direct deposits between multiple accounts. Ask your company to send some amount of each check to your savings. That way, you never see the money in your checking account and never miss having it.
If you can’t do that, set up automatic weekly or monthly transfers from your checking to your savings account.
Save cash back and windfalls
If you have a cash-back credit card, your rewards are another great savings tool. If you redeem your cash-back to your savings account, your balance will grow over time with no extra effort on your part.
Similarly, if you get an unexpected windfall, resist the urge to spend it or splurge on something. If you put that money into your emergency fund you can accelerate your progress toward your savings goal.
If you get a big windfall, it can be okay to splurge a little, but try to put the majority of the cash into savings.
Choose a high-yield savings account
Open a high-yield savings account for your emergency fund. You can even consider using an online bank or a different bank from your typical bank. This has the added benefit of making the emergency fund a bit harder to access, reducing the temptation to spend the money you’ve saved.
Every penny of interest you earn is a penny you don’t have to save and some high-yield accounts offer relatively good rates that can accelerate you toward your goal.
Celebrate the small victories
There’s no avoiding the truth. Saving isn’t the most exciting thing in the world. However, it’s an important part of having a healthy financial life.
It’s important to take note of your successes and celebrate them. Let yourself feel excited when you reach a goal like setting aside $1,000 and do something small to reward yourself, like going out to a movie or getting a meal at a favorite restaurant.
If you can make saving fun, you’ll make it easier for you to reach your goal.
Saving is one of those things that everyone should do, even if they don’t really want to. With uncertain economic times approaching, it’s important to start building that safety net.
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