We all go through hard times. Whether it’s a personal problem, like losing your job or a health emergency or a national crisis, like an economic downturn or a pandemic, we are bound to encounter periods of hardship in our lives. And in times like these, it’s crucial to have a financial safety net to help you get through stormy seas as smoothly as possible. But how do you build an emergency fund? Let’s dive into the nitty-gritty of saving for the unexpected.
Build an emergency fund: Step #1 – Plan your budget
There’s no universal recipe you can follow when you want to build an emergency fund. It largely depends on your income, your savings, how much you spend every month, and what types of emergencies you need to prepare for. An often-quoted rule is to save as much as you would need to manage six months of unemployment. However, for many Americans, this goal is unrealistic. It’s something we should all strive for, of course, but you need to take your actual budget into account when preparing for a crisis. That’s why planning your budget is the first step in building an emergency fund. After all, if you don’t know how much you’re spending and how much you could be saving, you won’t be able to put money away for hard times.
Use a spreadsheet to write down how much you spend on:
- Rent/mortgage payments
- Debt payments 401(k), Roth IRA investments
- Any ongoing medical services or medication you require
- Fuel for your car or public transportation passes
- Household supplies (cleaning, maintenance)
- Clothing & shoes
- Personal care essentials (shampoo, soap, toothpaste, toothbrush, moisturizer, etc.)
- If it’s the case, childcare, afterschool classes, school supplies, field trips, etc.
- If it’s the case, pet food, vet visits
- Entertainment (such as cable, video & music streaming services, subscriptions to gaming platforms)
- Dining out
- Non-essential food & household items (snacks, drinks, beauty products, etc.)
- Gym memberships
- Newspapers, magazines, books
- Transportation through ridesharing or cab services
You can divide these costs into additional categories, depending on what works best for you. Each of us has a different idea of what we need to survive and what we think we can do without. If you have mental health issues, some entertainment services or home deliveries can make a huge difference in managing such an illness. The same applies to chronic health problems that prevent you from going out and doing your own shopping or require you to buy specific and more expensive personal care products.
Build an emergency fund: Step #2 – Set goals based on real scenarios
Once you’ve successfully organized your daily and monthly spending, it’s time to consider how to build an emergency fund based on the crises you could face:
- On a national level, the most likely effect of a crisis would be massive job losses and loss of resources. Economic downturns, pandemics and international or domestic conflicts can lead to these issues.
- On a regional level, the most common type of crisis is a natural disaster. Depending on your area, you could face hurricanes, wildfires, landslides, and more.
- On a personal level, you should consider job loss and health problems.
These scenarios each come with their own tricky calculations. While a pandemic will likely last a few months, downturns can go on for years and are likely to happen around once per decade. The severity of the crisis matters as well. In essence, a flu epidemic will likely have a smaller impact than a pandemic created by a new disease, such as COVID-19. At the same time, a financial crisis can be less severe, such as the early 2000s Dot-com bubble, or can ripple through the entire economy for years, such as the 2007-2009 Financial Crisis. When it comes to natural disasters, if you live in a high-risk area, the worst that can happen is not only losing your job but losing your home as well.
In the direst scenarios, building an emergency fund with enough savings for around six months would be ideal. However, if you aim for just enough to get you through a short rough patch, start with one or three months’ savings as a goal, and work your way up from there.
Keep in mind you should build an emergency fund separate from a rainy day fund. If you can, you should manage repairs to everyday items or smaller medical expenses with a rainy day fund, where you’ll keep less money on hand.
If you’re having a hard time assessing how much you can save based on your income and spending, you can get financial advice from experts for free. GreenPath Financial Wellness is a national nonprofit that helps people around the country. They can help you get out of debt, make housing decisions and manage your money.
Build an emergency fund: Step #3 – Start saving
You know how much you’re spending and what to prepare for. Now comes the real question: how will save the money you need to build an emergency fund? The ugly truth is you will probably need to cut back on some of your spendings and even reconsider your current living arrangement if you’re serious about saving. However, if and when the worst happens, you will be grateful to yourself for having taken these steps to secure your future.
How to cut back on spending
The first area you will cut back on is the flexible spending section of your budget:
- Entertainment: cancel any subscriptions you don’t use often. For example, if you haven’t opened a streaming app for a week, you might not need it after all. When it comes to gaming, instead of purchasing digital versions of video games, go for physical copies instead so that you can resell them or exchange them for other games among online communities.
- Dining out and ordering in: if you can cook at home, cut down on eating out and ordering in as much as possible, and go for recipes that don’t require unreasonably expensive ingredients. Plenty of food websites have excellent recipes and advice for home cooks, even on a beginner level.
- Non-essential food items: eat fewer snacks, your bank account and your body will thank you.
- Gym memberships: find ways to exercise outdoors or indoors, without going to the gym. If you need guidance, free online resources will help you manage your exercise routine.
- Beauty and personal care products: try to find cheaper alternatives to the beauty products you use. Try out testers in-store to see if you can find a different brand for what you need, compare reviews online, and look for products with similar ingredients to what you’re currently using.
- Vacations: book your holidays early to find the best possible deals.
- Transportation: use public transit instead of ridesharing services or cabs whenever you can.
These tips are a great starting point in building an emergency fund, but you should trim down your fixed costs as well. How long has it been since you looked at cable providers and mobile phone plans? More often than not, you can probably find a better deal with some online research. Do the same for your health insurance plan. Furthermore, while buying fast fashion might seem like a budget-friendly option to dress, buying a few high-quality items that will last for years will save you a lot of money in the long run. You can also find quality clothing in thrift shops, where you can often snatch up unique pieces with minimal spending.
How to stay on top of your budget and savings
Keeping track of all your expenses and saving goals is a time-draining and challenging task, even for the most experienced of budgeters. Luckily, there’s more than one app for that, and they’re either completely free or offer free plans.
Mint will help you manage your budget daily and create realistic, personalized budget goals based on your spending habits. You can check how much money you’ll save by cutting back in any category, and keep an eye on how your spending will affect you short and longterm.
Albert monitors your income and your spending in realtime and alerts you when you’re about to overspend. They also have a free automatic savings feature to help you reach your goals. Plus, if you want to invest some of your income, Albert will also create a safe, custom portfolio for you.
Goodbudget uses the envelope method, in which you put your income into “envelopes” based on spending categories so you can only spend as much as you planned. You can also track your debt payoffs and sync your budget with your entire household.
Find the app that’s best for you and get saving! As long as you keep track of your expenses, manage your budget and get serious about cutting unncessary costs, you’ll build a healthy emergency fund in less time than you’d think.
Published at Tue, 24 Mar 2020 12:39:29 +0000