How Do I Save For Emergencies?
If you don’t have an emergency fund, then there is a risk that you could suffer from a significant financial hardship in the future. Even if you’ve only just started working and are on a relatively low income, an emergency fund is something that you need to start building sooner rather than later.
The Advantages of Having an Emergency Fund
You may never have to use your emergency fund for anything significant, and that’s OK. The idea is that the money is there when it is needed, reducing the stress and the financial burden whenever you need to make large unexpected payments.
With an emergency fund you could:
- Have a buffer to cover rent and other costs if you lose your job.
- Pay for unexpected medical expenses that aren’t covered by insurance.
- Have travel options in the case of a family emergency.
- Make car and other repairs without needing to borrow through finance or a credit card.
An emergency fund can generate interest and if you never use it then it could be put towards retirement savings.
Starting an Emergency Fund with a Regular Savings Account
Getting your emergency fund started is as simple as putting some money away into a savings account. Most financial analysts recommend that your fund be at least three months’ worth of your essential living costs. In this day and age, saving six months of your living expenses would be ideal.
To calculate how much you need to cover your living expenses. Add all your expenses and debts, including:
- Rent/mortgage
- Apartment rental insurance
- Utilities/cable
- Cell phone
- Car note
- Car insurance
- Student loan payment
- Credit card & other personal debts
- Car fuel/gas
- Groceries
- miscellaneous expenses, e.g. dry cleaning, day care fees. Etc.
How Much to Save Each Month?
The 10% rule is one that works for most people. Simply take 10% of your net income or take-home pay and put it into a savings account each time that you receive your paycheck.
For example, if your total take home pay per month is $2,500, you would save $250. Now, you may not be able to save that entire amount from the first paycheck of the month if you are paying rent and other high living expenses. So, you would have to pull that amount from the second paycheck of the month.
Another option is to pull half from the first paycheck and the other half from the second paycheck.
If you can save more than 10%, do so. If you cannot save 10%, save the amount you can but be consistent.
Setup Direct Deposit
The easiest way to save is to have the money direct deposited into a separate account BEFORE you get it. You can often set up direct deposit with your employer by going through Human Resources or Payroll dept. You will need to provide your bank or credit union routing number (that’s your bank’s identification number) which you can get by calling them or via your online banking account.
You will also need to provide your personal checking or savings account number. So, a large portion of your paycheck will be deposited into your checking account to pay bills and the savings amount will be deposited into another account.
This means you will have to learn to live on 90% of your take home pay. For most people, it is very doable. Try it!
Ways to Build Your Fund Faster
The point of an emergency fund is that it should be there when you need it. It’s more about the peace of mind than the actual money. The faster you can build your fund, the more relaxed you will be. There are many ways to quickly develop a fund:
- Take on a part time job for a year or so and put the income directly into your emergency fund savings. If you can save more than six months, that’s even better.
- Use your car to offer rides through Uber or Lyft. You can work as much or little as you want. You have the flexibility to earn however much you want.
- Find one-off income opportunities. This could include freelance work, contract work, or any type of work that is not regular. Taking odd jobs could give you a boost in your savings. One place to offer your freelance work is on Fiverr.com
- Clear out the clutter in your closets and/or storage and make some money selling the stuff you no longer use, or, have a yard sale or list your unneeded items online. Even some of the smallest items could add up, leaving you with a better head start on your savings.
Starting an emergency fund can take some discipline but it’s worth the effort. You should aim to start yours as soon as possible, and even the smallest contributions will be better than never starting one at all.
If you have questions that needs answers, consider JustDoItAfraid.com, our mentorship program for young adults.
That’s it for now,
Dr. Linda