Occasionally, life will throw a financial curve ball your way. It’s not a matter of “if” but “when”. And when that happens, it’s good to be prepared. A mild drizzle of unexpected doctors’ bills, a parking ticket, or even a baby shower invite can put a little bump in your budget that is easily managed. But, what would happen if you face an unexpected life event like losing your job, which has the potential to not just bump, but completely derail your budget? If you find yourself in the middle of a major financial setback, usher back in the sunshine with a key savings strategy: the emergency fund.
The what and why of emergency funds
An emergency fund is a savings plan you create for exactly what it’s named after – emergencies. Think: Fido fractures his femur, and you take your bundle of fluff down to the doggie doctor to get fixed up, only to learn this very expensive vet bill will also fracture your wallet. According to Emergency Vets USA, that femur fix can run you into thousands! This is where your emergency fund comes in to save the day. Having this stash of cash set aside to tackle crisis costs is important because you’ll keep yourself out of debt, minimize money-related stress, and get back to Fido fetching that ball again in no time!
How to build an emergency fund
Putting aside some serious savings might seem like a daunting task, but, it can be made more manageable with some simple strategies.
The first place to start is determining how much you should put away, right? Show me the money! According to CNBC, most financial experts agree you should have between three to six months of monthly expenses bankrolled for a major setback. When building your emergency budget, you need to consider rent, utilities, food, leisure activities, and current debt. How much you should put away depends on your current income, budget, and if you are willing to cut back on your margarita Mondays.
Once you’ve determined how many margaritas you can live without in the case of an emergency, you can get started on your savings goal. Starting small is the easiest way to make things happen and the most satisfying – try squirreling away $500 in your savings account to start. Once you reach that goal, set a new one to double it! Pretty soon, you’ll have a nice little nest egg ready to bail you out of a future fender bender.
Need some tips for setting aside some extra cash? Here are five ideas to help you start pinching your pennies:
Just a few dollars a day can add up pretty quickly – once you decide to start saving. Even putting away $20 each month adds up fast and can have a long term impact toward your goals.
Love it or list it:
Take a look around your home, garage or storage shed if you have one. There are no doubt quite a few items you could easily part with that could bring in some extra cash just by listing them online for sale. This is a great way to get a jump start on your savings goal.
Keep the change:
Try designating a jar in your house and ask family members to fill it with all their loose change. Once it’s full, deposit it at the bank and start again. Those coins can add up quick!
Some banks offer to automatically round up daily purchases and put the extra money into your savings account. If your bank doesn’t have this service, get an investment app like Acorns that automatically rounds up any payments you make to the nearest dollar and sends that extra change into your savings. Automating your savings is one of the simplest ways to get big gains fast. This article from Part-Time Money lists some of the best round-up apps for saving to help you get started.
Take a look at your current monthly budget and assess what changes you could make to divert that expense to savings. Maybe instead of your twice a week Chipotle lunch or Netflix, Hulu, and Disney+ subscriptions (because you can’t just have one!), try packing a lunch instead. And do you really need those new shoes? Start building your emergency fund by simply cutting down your expenses. You will get a two-fold benefit from doing so: (1) extra cash in your savings and (2) a pared down lifestyle in the event your income is seriously reduced.
Now that we’ve walked you through the basics of creating an emergency fund of your very own, it’s time to map out your own plan! So, the next time your fridge goes into meltdown mode, you need an emergency root canal, or Fido fractures his other femur (fingers crossed that’s a no), we hope these tips help you face life fearlessly!
Looking for more money tips? Moneytree is here to help – check out our Smart Money page for more info.