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6 Secrets to Building an Emergency Fund

March 5, 2021

If you’re struggling to make ends meet this year, you’re not alone. Amid the ongoing coronavirus crisis, roughly 30 million Americans still face unemployment, compounding existing struggles for workers who were already living paycheck-to-paycheck. For many us, it created even more of a reason to build an emergency fund.

6 Secrets to Build Your Emergency Fund

If 2020 has taught us one thing, its that we need to be as prepared as possible for the unexpected. In these difficult times, finding the mental space to build a complicated savings plan (or do any kind of planning at all) may feel far from doable. But take heart. You can grow a solid emergency fund without adding to the stress you’re already feeling. 

Your emergency fund savings goal isn’t set in stone. 

Experts generally recommend saving three to six months’ worth of expenses. While this is a good rule to live by, right now that can be difficult for many—if not downright impossible. 

What to do instead? Try reinventing your goal.  

For example, you might start by saving up enough to cover your essential expenses for one month. After you’ve reached your goal, you can build to two or three months’ worth of expenses. Add non-essential expenses like your smartphone data plan to the mix. Or, start saving for unexpected expenses like car repairs or medical bills. 

The important thing to remember is that it’s you who gets to decide what your goals are. And as your life changes, so can your goals. 

Need a little help deciding what a reasonable goal might look like for you? Start by tracking your fixed and variable monthly expenses. 

Examples of fixed expenses include: 

  • Mortgage or rent  
  • Auto payments and insurance  
  • Health insurance  

Variable expenses include: 

  • Groceries  
  • Utility bills 
  • Pet cost and care  

Once you know your monthly expenses, use that number as a baseline to set your first goal. 

Save what you can.

We have a tendency to “go big or go home.” Once we set our minds to something, we want to get it done as fast as possible. And often, when we think we aren’t keeping up, a lot of us end up frustrated, anxious, and down on ourselves.  

But the truth is, very few people can build emergency funds overnight. Saving takes time. And we all have financial emergencies and unexpected events that can set us back from time to time. 

If you’re feeling stressed, start small and start saving what you can. For example, try canceling a few streaming subscriptions. Once you’ve saved enough money to cover a weeks’ worth of groceries, give yourself a high five. Or, try dropping those meal boxes or other conveniences until you’ve saved up enough for one month’s rent. Any extra money you set aside is worth celebrating, no matter how small. 

Peace of mind comes from small changes.  

Making small changes over time can help you save money in the long run. 

For example, say you’re having lunch delivered at $35 a pop three times a week while working from home. That adds up to $105 per week or $420 per month. If you cut down to one delivery per week, you’d save about $280 a month you could put toward a rainy-day fund. 

Making small changes to your spending habits over time can help you build savings and reduce your living expenses. Be persistent because it may feel challenging at first. Your momentum (and your confidence) will build once you see your emergency fund start to grow. 

Not sure where to start? The key is to look for small moves you can make without feeling overwhelmed by change. For example, leave your debit card at home and pay for groceries in cash. Set up a direct deposit to your savings. Or bike to work. Any positive change in your spending habits (again, no matter how small) will make a difference.  

Set an emergency fund deadline.  

Setting (and consistently reaching) a deadline is a great motivational tool to help you reach your financial goals. 

Once you have your first emergency fund goal in place, set a reasonable deadline to reach it. One you know you can meet. Many personal finance apps track your goal progress. Simply circling a date on a wall calendar works, too. 

If you find yourself still struggling to stay motivated, try creating micro-deadlines. Break your goal into chunks and set target dates for each. As you reach each micro-deadline and your minimum balance grows, you’ll feel motivated. 

Keep in mind while you want to try to reach your deadline, life isn’t always clear cut. If you face a job loss or have an unexpected expense, don’t throw in the towel. And don’t get down on yourself. Just move that deadline ahead to a new reasonable target—and keep saving at the next reasonable opportunity. 

Kick debt to the curb.

High-interest rates could be cutting into your savings. In 2019, Americans were carrying $6,194 in credit card debt on average, according to Experian. 

If you can afford it, repaying debt while you build your emergency fund could save you hundreds (or thousands) in interest over time. For example, with a debt consolidation loan, you borrow what you need to pay down all (or most) of your credit card balances. You (or your lender) pays off your creditors, and you make one single payment — typically with a much lower interest rate — to the lender. 

Be sure to consider your situation, and the lender, carefully. You’ll want to know you’re getting the best rate and terms at a monthly payment that you can afford to pay each month. Comparison shop for rates to get the best offer. Read all the loan documentation before you sign, and watch for red flags like hidden monthly fees. 

Make your money earn money.

Your emergency fund should be earning interest at all times, not just holding space in your bank account. Make sure you stash your cash in the right place. 

One of the best ways to do this is by using a high yield savings account, which pays higher interest than a standard checking account. Keep in mind, to open a high yield savings account, you’ll often have to start with a large opening deposit. In the beginning, it may make sense to open a simple interest-bearing savings account. Once your emergency savings grow, you can graduate to a savings account that yields a higher return.

Other options like money market accounts, mutual funds, or short-term certificates of deposits may offer higher interest. But you may face withdrawal limits or penalties if you need to withdraw early due to unexpected emergencies

The Bottom Line 

Remember, it takes time to build your safety net, and no action is too small. Take time to reflect on your savings goals, set reasonable deadlines, make early payments when possible, make adjustments when life throws curveballs, and celebrate your progress along the way. And if you find yourself in a sticky situation without (or without enough) emergency funds, there’s still solutions out there. A personal loan, for example, may be able to help provide the funds you need with terms you can afford. 

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