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Have you ever had something urgent pop-up so you look at your savings but only see tumbleweeds? So, you panic and pull out your credit card or beg good ol’ Aunt Sallie for the money with the promise to pay it back?
Yep, but don’t feel bad.
40% of Americans don’t have enough saved to cover even a $400 emergency expense! #Tragic.
Now, imagine how good it would feel to be handed an unexpected bill and know you’ve got it in the bank. That is the type of financial badassery we’re aspiring to have here, and an emergency fund is a key component!
First off, what’s an emergency fund?
An emergency fund is a fund specifically for emergencies. Mind-blowing, right?
Ok, not really but it is exactly as it sounds. You save up a certain amount of money that acts as a safety net during the times you experience a financial emergency. This could be:
- Auto repairs
- A new roof
- Unexpected medical expenses
The list can go on and on, but here’s the catch…it has to be a true emergency otherwise you’ll defeat its purpose. A last-minute vacation may feel like an emergency, but it’s not a necessity.
What’s the point of building an emergency fund?
An emergency fund keeps you out of debt, or from sinking further into it. Let’s say you have nothing saved and all of a sudden you need emergency medical services. The day was going great and then boom your finances go up in flames, especially if you’re living paycheck to paycheck. Now you risk falling behind on bills and dealing with unnecessary stress.
You can’t time emergencies, but you can prepare for them to help soften the blow.
How much do I need to save?
There’s no one-size-fits-all amount that you need to have saved in an emergency fund because everyone’s expenses and needs differ. It’s advised to save at least $1,000 but eventually, move to 3-6 months’ worth of your living expenses.
Steps for building an emergency fund
Set a goal and make it official!
Goal-setting is not just for summer bods and the workplace, you need them for your finances too!
When you set a goal, you become a lot more intentional with your spending. They help to keep you laser-focused, and once you reach one you feel like a lotto winner and want to push yourself further because you’ve proven that you can effin’ do it!
When you set your goal, make sure to be specific.
- The amount you want to save
- The date you want to reach the goal
- How you will reach the goal
- Why you set the goal in the first place
So, let’s say I want to save $1,500 in exactly six months. I’ll need to save $250 each month to reach this goal, but I’m strapped for cash and pretty much live paycheck to paycheck. My reason for setting the goal (my “why”) is so I can comfortably pay down debt without worrying that something will pop up and disrupt the process.
During your goal-setting session, you’re pushing yourself to come up with a plan in order to get to your targeted goal. Instead of simply telling yourself that you can’t do it, you’re putting your mind to work in order to make this thing happen!
When you start to experience burnout and feel discouraged, revisit your goals, and let your “why” be the strength that gets you to the finish line.
Determine how much you can realistically set aside
There’s no quicker way to set yourself back than to deposit an amount unrealistic to your current financial situation. It’s easy to get excited and shoot for the stars, but aiming too high can result in needing some of that money back to use towards other obligations.
Then, you’re left feeling crushed because you really wanted to save $400 each month but can truly only contribute $250.
Before you can determine how much you can safely save, you must first understand where your income stands in comparison to your expenses. Yep, you need a budget. Without one, how will you know how much money you’re bringing to the table and how much is leaving?
If you don’t have a budget yet, I’ve got you covered ????. My free Budget Boss eBook gives you everything from a simple step-by-step strategy to tips that will help you find hidden money!
Once you calculate your spendable income (the money remaining after expenses are subtracted from income) then you can make an informed decision on how much you will add to savings. Remember that it’s better to start low and wind up saving more than anticipated versus aiming too high and needing the money back!
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Automate your savings!
Automating your savings is taking the smarter-not-harder approach. To sum it up, it’s when funds are automatically deposited into your account of choice for you. There’s nothing you have to do manually once the process is set-up so you’re saving without having to think about it!
Here’s how to do it:
- Choose a designated account. Whether you choose to use a free checking account or a regular savings account, it’s important to keep your contributions separated from the rest of your money. This way you’re not using what should be saved.
- Set up direct deposit. Change your direct deposit payment elections via your employer by adding the bank account information and the amount you want to save from each paycheck. If your employer doesn’t offer direct deposit, set up a recurring transfer between accounts via online banking.
Voila! That’s it.
If you’re forgetful or have a hard time committing then this is extremely beneficial. That deposit is going to happen whether you like it or not, and you build discipline as you learn to manage without the funds that are saved.
Stop spending so much money on crap!
Easier said than done, right?
In my opinion, good financial management is 40% knowledge and 60% behavior.
As humans, we cling to things that make us feel good and repel the things that don’t. Making the switch from a senseless spender to a responsible spender is like going on a diet and to be honest, it sucks. It takes a ton of willpower to tell yourself no, but the more you do it the easier it becomes and pretty soon you’re staring at yourself in the mirror saying, “I look good!” In this instance, you’ll be staring at your bank account.
Even in a society stricken with consumerism, you have to give your wants a rest in order to focus on your needs. Think about it, if you’re always spending then how will you start building an emergency fund fast? Unless you have a high income, it’s going to be pretty darn difficult. Yes, spending feels good (temporarily) but watching your account balance grow feels better. Trust me! ????
Quick tips to reduce spending:
Review your goals regularly– Goals, goals, goals! Schedule time to revisit your goals regularly (weekly, bi-weekly, monthly, quarterly, etc.) to measure your progress and to determine if it’s still realistic to your current financial situation.
Focus on your weaknesses– For once, you’ll need to focus on your weaknesses. Knowing what you struggle with financially allows you to come up with a strategy to remedy your issues. Instead of throwing a blanket over your problems, they’re front and center so you must face them head-on.
Not sure where your weak spots are? Go through your bank statements to see what transactions you make regularly that are non-essential expenses. I’ll go first, I love Starbucks and it’s definitely a weakness of mine. If I see ‘Starbucks’ on my statements too many times, I will then add up each transaction to see how much I’m spending each month.
Depending on that amount, I’ll know if I need to monitor my spending to ensure I’m not spending too much on coffee!
Track your spending- Tracking your spending is a great way to hold yourself accountable and it provides an in-depth look at exactly where all of your money is going. Doing this is easy. Anytime you make a purchase, jot down the time, the purchase, and the place. You can use a good ol’ piece of paper and pen, a journal, spreadsheet, or an app like Personal Capital. It’s free to use, allows you to view all of your accounts under one log-in, and more! Check out my review here.
Use cash-Using cash gives you a great visual of how well you’re doing with your budget. Obviously, when you see a stack of twenties you know you’re doing alright, but when you see a few singles then you know it’s time to slow your roll.
When you ditch the plastic and start witnessing the effects your spending habits have on your money, you’ll find yourself evaluating if you really need to make a purchase or not. Since using the cash envelope system, I’ve consistently come in under budget and use the extra cash to save or pay down debt.
Find a community
It doesn’t matter how independent you are, everyone benefits from a supportive community. Yes, it may sound cliché, I thought it did too, but you’ll be surprised to find your own strength when you surround yourself with others on the same, or similar, journey as you.
During the times you just want to quit, having others rooting for you is priceless. If you’re feeling unmotivated, witnessing the wins of someone else will light a fire under you. When you’re under the watchful eyes of others, you’re forced to take accountability for your actions and think twice.
Don’t have anyone in your area you can connect with? There’s a second world called social media, and the personal finance community is literally the best! Join me on Instagram here!
Make more moolah
Yep, this tip was coming. It’s a no-brainer that increasing your income will have your building your emergency fund fast so it had to make the list.
Contrary to belief, making more money doesn’t have to be a grueling, time-sucking process. You can opt to make it a one-time thing, such as hosting a garage sale, or something you do consistently, like side hustling.
Having funds to fall back on when things get “real” is the ultimate peace of mind. You do not have to empty out your other savings accounts or run up the credit card you were so close to paying off all because you had nothing to protect you from a 911 situation. It may take a bit of work, but building an emergency fund fast is totally doable!