Imagine that something unexpected and undesirable happens in your life — you break your leg, you lose your job , your refrigerator dies, or a family member goes through a crisis. The worst part of these unfortunate scenarios is that none of them are that far-fetched. If any of these things were to happen to you today, what would you do? What is your plan? Can you count on an emergency fund?
If your answer is a resounding symphony of crickets, you’re not alone. Around 55 million adults are thought to have no emergency savings at all and around 60% of millennials report being unprepared to handle a $1,000 emergency. Actually, according to experts, even an emergency fund of $1,000 probably isn’t enough.
Having an emergency fund is essential to your financial security and general well being because it can prevent a bad situation from getting worse. If you already have your rent, groceries, and other essentials covered for the next several months when a crisis strikes, you can avoid being forced into debt from last-minute, high-interest borrowing. Ultimately, something that can turn a seemingly short-term crisis into a long-term financial problem.
Most people understand the utility of having an emergency fund, but when you’re cornered between daily living expenses and paying off debts, creating rainy day savings sounds a bit like alchemy. How do you make something out of nothing, anyway?
Consider these tips to set you on the right path:
Establish your goal
Begin by determining your average essential monthly spending. Be both realistic and frugal when considering groceries, housing, insurances, family and medical expenses, necessary debt repayment needs, and any other absolutely essential spending.
If you calculate your needs for essential spending in terms of the bare minimum, you might be able to bring down the figure for your emergency fund a bit. If you had to tone down your avocado and craft beer addiction, change your gym membership, and travel by bus instead of taxi, you’d probably make it out alive…right?
Next, depending on your profession and where you live, consider how long you might need to survive off of savings if you suddenly had no income. If your job is in high demand and generally more stable (i.e. tenured professionals like many of those in the healthcare field), you’ll probably be able to get by with a smaller emergency fund.
However, if your work tends to be seasonal, freelance, or less predictable for any other reason, you may actually need to consider fattening up your emergency cushion so that you could get by for 6 months or more without steady work.
Your emergency fund will also need to take into account your personal situation — could a trusted loved one step in to help if absolutely necessary? Are you responsible for caring for someone else? All of these factors will help you to determine how much of an emergency fund you will ultimately need.
Plan to meet your goal
Once you’ve decided upon a figure, don’t be startled. Especially if you’re on a tight budget as is, saving up for some possible crises may seem impossible and unnecessary. But remember, although having an emergency fund is important, it’s probably not urgent. If you ultimately decide that you’ll need $5,000 to get by for a few months in a worse-case scenario, make a reasonable plan to achieve that goal.
Make setting aside for emergency savings part of your normal budget. If you already follow a spending plan like the 50-30-20 strategy that allows you to dedicate part of your income to debt repayment and savings, you can set aside a part of your savings budget for an emergency fund over several months until you’ve met your goal. Try automating your savings transfers to make this easier.
If your primary work already pays your bills, you can also consider getting a side hustle in order to meet this savings goal.
Activate the power of your emergency fund
Stuffing your emergency funds underneath your mattress might not be the best financial move. If you decide to do that, you’ll be missing out on investment opportunities to make your emergency fund work for you. As you decide where to put these funds, remember that it’s essential that they be easily accessible.
Investing even just a part of your well-established emergency fund is a great option. Consider a money market account, certificates of deposit, and even low-risk investment options. Over time, gains from investments and interest rates can even help you to bulk up your emergency savings.
Emergencies are inherently scary. But, preparing for them doesn’t have to be. Having a plan can even make them a bit more manageable if they do arise. Creating an emergency fund can cushion the blow of unexpected life events. To achieve the peace of mind that emergency preparedness provides you, try following these tips. After all, you never know when the next rainy day is just around the corner.
