Unexpected financial crises and emergencies are inevitable. They come and go like seasons. But if you live paycheck to paycheck, in case of crisis comes knocking at your door, how do you plan to tackle it?
Would you have money stashed somewhere to cover those expenses? If not, you could be knee-deep in financial difficulty, leading you down the path of selling things or asking for loans to compensate for the cost of the emergency.
In a study conducted by the Federal Reserve for Economic Wellbeing of U.S. Households, it was reported that on average, 47% of the US citizens would find themselves in trouble if they had to raise $400 for an emergency situation, without relying on plastic, borrowing money, or giving something up for sale.
Therefore, an emergency fund is mandatory to ensure financial security in uncertain situations. By accumulating small amounts of money, you will be able to create a nest egg for yourself.
As a wise man once said, “It wasn’t raining when Noah built the ark.” Being proactive provides shelter for you on rainy days. However, we understand that starting from scratch can be a little difficult, which is why we have tips below to streamline the process of building up an emergency fund for you.
10 Ways to Build an Emergency Fund When Money's Tight
Creating an emergency fund is one of the smartest financial gifts you can give to yourself. Here's how to build an emergency fund even when money's tight.
Family expenses, cable, and internet bills, debt and rent, all play an intimidating role when we start planning on saving for an emergency fund, mainly because it seems like every penny of our income is already accounted for.
Nevertheless, creating a strong reserve of cash can be a great tool to achieve financial peace of mind in case something unexpected happens.
1. Have a separate account for your emergency fund
Where you put your saved-up money makes a significant difference. For your emergency fund to consistently grow, you need to learn to keep your hands off it, unless, of course, there is an emergency.
Initially, you may think it is convenient to keep your savings in your current account, but it will actually run you down the path of failure. Financial experts suggest keeping all the amount you accumulated separately from your core account.
You might want to consider opting for an account that has a reasonable interest rate to give a boost to your total savings. You can see a list of the top rated online savings accounts here.
2. Start small
Financial advisors swear by an emergency fund and advise it for financial stability. Although, for an average US citizen, it can be daunting to gather up hundreds and thousands of dollars, considering the major portion of their salary that goes into mortgage payments, credit card bills, and retirement funds every month, it is a good idea to take baby steps.
Even $5 – $10 every day can go a long way in establishing your emergency fund. One important thing that you should keep in mind is that you shouldn’t concern yourself with the end amount of the emergency fund on a regular basis as it can derail your goal. Yes, it takes time to accumulate a large amount of money, but perseverance and grit are going to get you there.
3. Address your debt properly
Saving may not be a consideration for someone who is struggling to get out of debt, especially with high-interest obligations, like credit cards. In this scenario, it may be wise to pay down balances first, as fast as you can and manage your debt. After this, you'll have more ground to start planning an emergency fund.
Now, if you have handled your credit well, and your balances are low, you can start saving for an emergency fund while taking care of your credit obligations.
4. Make a budget
Making a budget is the only way to have a better view of your financial situation, this control will allow you to know which aspects are more prone to cuts. Easy things, like start bringing lunch to work, riding a bicycle or using public transportation to get to work can represent cuts that will allow you to have more income each month.
If you are responsible enough and commit yourself to making sacrifices, you can see positive results in a matter of weeks. You just need to enhance your budget-making skills, and the internet is a good source of online tools that can help you enhance your budget-making skills.
5. Create short-term goals
Daily expenses and debt may seem like they leave no room to put aside a large amount of money for emergencies, but that's not what's important. Getting started is what really matters.
It is important to see things realistically. Set achievable goals for the short term. The key is to start little by little no matter what the amount is. A small goal can be attempting to save $50 or $100 monthly, the important thing is to start building a good financial habit that can provide help during a financial emergency.
6. Trim down your expenses
While there are plenty of ways to cut down your overall expenses, we would recommend you approach this habit in a way that would actually make your emergency fund look good. So, for example, if for a while, you have been wanting to quit processed foods, soda, or canned goods, now is the right time to do it and put the saved money into your emergency fund.
In addition, check to see if you have any magazine or online subscriptions that you don’t use anymore. According to research conducted by McKinsey & Company, plenty of Americans have at least two subscriptions that they have opted for. So, once you have spotted unused subscriptions, cancel them.
Since we are on the subject of cutting down expenses, let’s talk about the havoc that coffee shops wreak on your budget. While you will hear some people scoff at the thought of saving money by cutting down on outside coffee, you can save as much as $7 on a day-to-day basis. Being determined can save you approximately $50 every week, which will make a substantial difference in your total accumulated amount for the emergency fund.
In addition to that, put any unexpected windfalls in the fund until you have saved up a reasonable portion of the total amount you have in mind.
Also, keep impulse purchases at bay. One way to do that is to practice the 72-hour rule. Instead of purchasing an item right away, you need to wait at least three days before you have made up your mind, in order to really know if you are acting on an impulse or you actually need what you are about to buy.
Once you have gotten into the habit of being thrifty, living cheap will come naturally to you.
7. Set up automatic transfers
Parting with your hard-earned money every month can be difficult. You could be tempted to spend that money on an everyday expenses, which is why, for your emergency fund to really build up, you may want to automate the process of setting money aside for it.
Just think of it as a monthly bill you pay, while you put it on automatic setting and build your nest egg without having to put thought into it every month.
You need to be aware and make use of the options out there that can help you save more consistently. It may happen that you want to start saving towards an emergency fund, but every time money comes in you forget to save or you don't have the time and you just spend the money.
Automatic transfers can help you with this problem.
If your employer does have direct deposit you can actually set a small portion of your salary and it will go directly to your emergency fund. That way you can save and you won't even notice, the money will be there in case something unexpected happens.
8. Open a savings accounts
Since emergency funds are created to be there for emergencies, it makes sense that they remain available to be used when you need them. In that sense, locking funds up in 5% high yield savings accounts that will charge a fee if you withdraw the money may not be the best idea.
Check with your bank and see what options they have that can also help you with this process. Savings accounts that offer 4% or more APY are a good option here.
9. Make more money
Boosting your earnings will give you more room to easily save up for emergencies. This means that you need to look for other sources of income like flexible side jobs.
Right now a lot of people are using a side hustle to generate additional income streams. Or, if your schedule isn’t jam-packed and has wiggle room for a part-time job, then consider going for it. It will give you a salary boost and make the process of saving up for an emergency fund a lot easier.
Your second job can actually be based on your talents so that you enjoy having it. Maybe you have always been into taking photos, creating banners, or writing articles. These are actually skills that can get you paid, so consider cashing in on your talents.
10. Revisit your budget monthly
We would recommend that you glance at your emergency fund every month so that you have an idea about the pace at which it is growing.
If it looks decent, great. If not, you need to examine your monthly expenses and see if there are any areas where you can cut down costs to add more money to the pot.
Why Do You Need an Emergency Fund?
Having a 6-month emergency savings fund is harder for some generations. According to a new survey from Bankrate, 66 million Americans do not have emergency savings.
To sum it up:
- One-third of Americans ages 36-51 years old (Gen X) have savings.
- Only 27% of other Americans of all ages have anything saved up.
It's no secret that it is very important to have an emergency fund of 6 months of liquid cash so that in the event of an emergency such as losing your job, medical bills, or auto maintenance you will be covered. But an astonishing only 28% of all Americans, according to the new survey, have put aside any savings into this emergency fund for 6 months of expenses. The silver lining if there is one?
That percentage has risen by 6% from one year ago. Furthermore, nearly half of Americans older than 71 years old have enough savings for six months of living expenses. Millennials (ages 18 through 34) have the same saving habits as Gen Xers, with two-thirds reporting at least some savings.
The one-third without savings should check out ways to save by eliminating debt and alternative money making methods. It may be difficult for more millennials to save when they are in low-paying jobs and have crippling student loans. However, it is not your salary that makes you rich, it is your spending habits.
According to the study, half of the Americans with annual incomes of 75K or more have emergency savings funds, while more than half of Americans with incomes of less than 30k have nothing saved.
While top savings for an emergency savings fund competes with saving for retirement, paying off loans, rent, car payments, and all the expenses you incur every month: it still is possible.
How You Can Start Saving Money
But you know what? Over time building better saving habits gets easier and you can start saving money without even thinking about it.
Take a look at your budget and all your bills and see how much you have left over every month.
Take a portion of that and put it into a separate savings account where you won’t be able to spend it. Don’t even think about it anymore. Treat that money as if it was already gone. That puts you one step closer to financial freedom.
The best part? Setting a monthly savings goal becomes very addicting very quickly. You will work hard to meet your target and if you don’t, you will be disappointed.
Do this for yourself if you already don’t.
And if you are a saver, then always focus on increasing your goal. You will thank your future self. Make early retirement and paying off your mortgage a goal and always dream of it. If you work at it, you will get there.
The overall picture appears to be improving, however. June marks the 25th consecutive month that Americans' financial security has improved, with men reporting more security for the 28th straight month. Women have reported increasing financial security in 16 of 28 months including eight of the past 12.
It is no longer the day and age where you need a financial advisor, with the internet you can gather the help you need.
Inertia leads you nowhere, so, to propel yourself in the right direction you need to build positive momentum regardless of how tiny the steps are. Like Lao Tzu said, “The journey of a thousand miles begins with one step;” great things can be achieved with just a little determination.