The truth is, bad things happen to good people all the time, and usually when you’re least prepared for them. The best thing you can do for your future self is to start building an emergency fund NOW so that you have money reserved for those unpleasant surprises! Here are 3 methods to start saving now.
If you’re living paycheck to paycheck or maybe just a little above that, the idea of intentionally socking money to just sit there in case of an emergency feels like an unaffordable luxury. You’re not alone. Approximately 62% of Americans have less than $1,000 in their savings accounts and 21% don’t even have a savings account.
There are some people who are truly budget negative – meaning their lives are costing them more than they’re making and they literally don’t have a penny to spare.
For the rest of us, many times it’s just a matter of spending on things that don’t matter or not making savings a priority when we do have a couple of extra bucks.
Why you need to have an emergency fund
Consider what your options would be if any of these happened to you tomorrow:
- Your car needs very expensive repairs.
- You need an unexpected medical procedure but you have no insurance or a very high deductible.
- One of your pets requires emergency vet care.
- A massive tree falls down in your yard, but because it didn’t actually hit your house your homeowner’s insurance doesn’t cover having it removed.
- You lose a job to cutbacks and find yourself with no income, or piddly unemployment wages that don’t cover everything.
I didn’t have to use my imagination to come up with these scenarios.
Every one of these has happened to me. Every. Friggin’. One.
Maybe I’m extraordinarily unlucky, but I don’t think so. This is just adult life. Bad, expensive shit happens to good people every day, and you are no exception, my friend.
In some of these situations (the earlier ones) I was completely unprepared. I had to tap my credit cards, ask for help from family – once, when my car needed $1400 of work just to get it inspected, my amazing mother came to the rescue and we both sold a bunch of jewelry (some of it gifts from my late father) to scrape together the cash. It was sad and humiliating and very, very humbling.
So. 1) Thank you, Mom. You are the actual best ever. 2) I’m sorry I was such a mess back then. I’ve learned from my mistakes.
You need an emergency fund for when life pulls the rug out. And it will pull the rug out.
The good news is, with a little careful planning and some smart choices you can plan for these things in advance so that you’re in a good position when they happen. Pull up a chair and I’ll tell you how.
How much should you save?
There’s a lot of advice from financial gurus about how much you should save in your emergency fund. One month’s expenses? Three months? Six months?
Six months expenses is a staggering number when you’re starting from zero. Even one month is huge if you’re just scraping by.
My advice to you is: Start by saving however much doesn’t feel overwhelming.
If you set your goal too high, it’s going to feel unattainable and hopeless. Start with a small amount, say $500. When you hit that, up it to $1,000. Every time you hit that goal, give yourself a high-five and then raise the number a little. Avoid thinking too much about what’s beyond that and focus on that next step.
I’m going to give you three methods to save for your emergency fund. You can pick the method that works best for you, or you can combine two or even all three of them to get it done faster. The important thing is that you don’t overwhelm yourself. Bite-size changes are the easiest to stick to.
Method 1: An automated transfer to your savings
This method is good for you if: You’re really good at keeping an eye on your bank balances.
What you’re going to do: Set up an automated transfer of a fixed amount at regular intervals into a Savings account.
You can do this with a savings account that you already own if you’re really disciplined about not touching it. Think about it and be honest with yourself. If you know that seeing that emergency fund sitting there when you log into your bank account will tempt you to tap it for other things, don’t keep it there.
I recommend opening account with SmartyPig. They’re an online bank and they’re FDIC insured (meaning your money is as safe there as at any other bank) and it’s very easy to open an account. Their interest rate is usually pretty good, which means you make about as much on your money there as you would with it sitting in a credit union. The nice thing about SmartyPig is that the money is accessible if you need it – you can transfer money back into your regular bank within about 24 hours. But it’s not so easy that you’re likely to do it for a new pair of shoes. It’s a nice, healthy barrier to protect against impulsive decisions.
This depends on keeping an eye on your bank balance because once you hit go, that money is going to keep coming out on its own. You need to remember that after every check, you’re going to automatically have $20 less because of the SmartyPig withdrawl.
This is how I started my emergency fund. I opened up a SmartyPig account and set it to transfer $20 from my regular checking account to my SmartyPig savings after every paycheck I received. Yep, I started with twenty bucks every two weeks. Start small if you have to.
Method 2: Sweep the excess
This method is good for you if: You already have yourself on a budget and you know how much you need week-to-week.
What you’re going to do: Every time your bank account passes that magic number that pays all your expenses, sweep the excess into your savings account.
This is something I still do today, even though I have a healthy savings account. If you know exactly how much money you need per week or per pay period to get all of your bills paid, plus some for gas, groceries and incidentals, you can keep an eye on your checking account for any time you pass that number. If you need help figuring out that magic number, there’s a spreadsheet in this post that you can copy to help you figure it out.
Here’s an example of how this looks for me:
My Dude and I keep a “household expenses” account (more details about how we split expenses here). When I get paid, I put my half of that money into that account. Then, I put money into my “personal bills” account. I know how much money needs to be in there every month to pay my cellphone, car insurance and Netflix. Then, the remainder goes into my regular checking. This pays for my gas, but everything else in it is for day-to-day stuff and fun money. I allow myself $300 in that account at any time.
Whenever that balance passes $300, I sweep the excess into my savings. I peek into my bank account at least once a week, so while the amounts aren’t always regular, I’m consistently throwing money in my savings. Your amounts will vary, but if you do this and keep at it, you’ll be shocked at how much you put away.
Another option: Every time you get a paycheck, sweep whatever is left from the previous paycheck (after bills are covered) into your savings.
Method 3: Bait and Switch
This method is good for you if: You spend a lot on little indulgences that you could cut back.
What you’re going to do: Figure out which of those little indulgences you can do without, then put that money into your emergency fund instead.
Say your Venti Mocha Latte usually costs you 5 bucks and you get one twice a week. Make some coffee at home instead and then transfer that $10 into your emergency fund. If your office always orders out on Fridays, pack a lunch and throw that $10 towards your emergency fund. Could you try cancelling your cable subscription? Take that $50 or $100 you were spending on 500 channels you never watched and put it in your emergency fund instead.
This one is hard because it requires sacrificing something you probably like. But if you’ve ever gotten slapped in the face with a big, unexpected expense, just remember how bad that feels. A couple of coffees, a greasy burger or Seinfeld reruns are a small price to pay to never have to feel that way again.
This is all about priorities, and what you’re willing to do now to protect future you from all that heartache.
Once you’ve saved it, what should you spend it on?
Emergencies, duh. But let’s talk about what qualifies as an emergency.
I consider something a good use of the emergency fund if it:
- Truly needs to be paid. Like there’s no opting out of it.
- Is unforeseeable. If you know you have a big expense on the horizon, save for that separately and in advance.
- Can’t be covered with cash any other way. There’s not enough in your checking account.
Everything else is just plain not a real emergency.
It’s very tempting when you first start saving an emergency fund to tap it for all kinds of things: That last-minute invitation to vacation with your friends! An upgrade to that appliance that isn’t quite broken yet but really sucks! A car to replace that still running but super dumpy ride!
But those are not true emergencies, and you could be saving in advance for all of those things in other ways.
It’s important to remember that your Emergency Fund is a safeguard against future catastrophe – unexpected, need-to-pay things that would cause you to have to incur credit card debt or loans, or would cause other necessary things, like mortgage or rent, to go unpaid.
Plus? Having a big fat emergency fund feels amazing. It feels secure. Do future you a solid and put money away for their peace of mind.
Do you have an emergency fund? If not, how do you plan to get started?