More than half of Americans couldn’t cover their living expenses for three straight months if they lost their jobs today. That, according to a Bankrate survey, is a devastating reality.
In fact, that same survey found that nearly a quarter of Americans have no emergency savings at all. This means if these people lose their jobs or their roof springs a leak, they will likely incur high-interest credit card debt in order to recover.
What’s the solution? An emergency fund. It’s money set aside for use in an emergency or to pay for an unexpected expense. For instance, an emergency fund can help us through job losses, medical expenses, and even home or auto repairs.
If you don't have an emergency fund, start one today. Here are six tips to help you set money aside so you’re not saddled with debt the next time you need some extra cash.
1. Separate Your Emergency Fund
Don’t use your primary checking account to hold your emergency fund. Why? Because it’s too easy to spend it that way on things that aren’t true emergencies. Like keeping candy in our pantry: If it's there, we're going to be tempted to take a piece! Don’t tempt yourself.
Use a savings or money market account instead. We use an Ally savings account for our emergency fund. We earn a small amount of interest on the money and it's impossible to accidentally spend because that money is completely separated from our primary checking account.
2. Make It a Goal To Save at Least Three Months of Living Expenses
As a minimum, try to save three months of living expenses in your savings account. Your living expenses include everything that you spend money on, including your rent or mortgage, food, gas, insurance and discretionary spending. Everything.
If this seems like a monumental task, don’t worry. Start small. Rome wasn’t built in a day and neither will your e-fund.
3. Don’t Over-save
Yes, over-saving is a thing. Saving too much of an emergency fund can reduce our wealth-building potential. Why? Because money that we save in our e-fund isn’t invested. Over time, investments help to grow our wealth, and in general, the idea is to maximize the amount of money that we have invested, not just saved.
Save enough money to cover you for at least three months. If you’re motivated enough, kick that number up to six months of living expenses to provide a little extra cushion. Then, invest as much as you can to build serious wealth.
Never forget that your emergency fund probably seems like a lot of cash, but it helps to reduce your risk in the market if things go south.
4. Start Small and Save What You Can
As I mentioned above, if you have no emergency fund (or just a small fund), it can be tough to think about saving up a few months of living expenses. It took my wife and me several years to build up our rainy day fund.
If you can only save $50 a week for a while, then do that. That's okay. But if you can save more, save more. The key here is to start with whatever you can, then slowly increase the amount that you’re saving as you make more money (or reduce your expenses). This isn't a race.
Again, open up a separate bank account, then use the power of automated bank transfers to add money to that account every month. More about the power of automation below.
5. Use Automation To Make Saving Your Emergency Fund Easy
Automation takes discipline out of this process by using computers to help us build our emergency fund. Luckily, most banks offer web-based systems that let us easily set up recurring monthly transfers. If you are not sure how to use your bank’s online system, give them a call to find out. Automating your emergency fund is worth the time on the phone.
For example, one strategy could involve setting up a recurring monthly transfer of $50 from your primary checking account (where your paychecks go) to your separate savings account that houses your emergency fund. That means every month, the bank automatically transfers that money. You don’t have to lift a finger.
The automated system will never forget. Set it up once, then forget it.
6. Make This Your Priority
As with anything big in life, make your emergency fund your top priority.I believe that building a solid emergency fund is more important than investing or paying off low-interest debt.
Remember that emergencies cause debt. If you’re investing without an emergency fund, stop investing and build up your e-fund. At least get it started. Then, continue investing as you were before.
Debts destroy wealth. And, the more prepared we are to financially withstand an unexpected expense or job loss, the better our chances of pulling through without incurring high-interest credit card debt. If you cannot easily cover a $1,000 emergency without using a credit card or borrowing money, make your rainy day fund your #1 priority.
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This article was produced and syndicated by Wealth of Geeks.
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