READER Q&A: How Can I Successfully Build My Emergency Fund?
Liz, 26 asks...
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Today’s question is from “Liz age 26”, and she asks:
How can I go about successfully building my emergency fund?
Well, saving successfully comes down to planning and consistency
Like most savings, an emergency fund will grow over time. When you create a plan and stay committed, you'll quickly reach your savings goal.
Here are 7 tips to help you reach your goal.
1. Determine how much you need
Start by figuring out how much you need by looking at the total cost of your core essentials for 3 to 6 months. These are purchases like rent, groceries, medical bills, and whatnot. You can use the list below as a guide:
Rent or mortgage payment
Groceries
Medical bills
Utilities
Car payments
Debt payments
Gas or other transportation costs
Cellphone or phone bills
Car insurance
Bank account fees
Pet care
Child care
Once you have your list together, add up the total cost of your essential bills. Then multiply that number by the months you want to save for.
Let's look at an example. Say your core expenses total $2,000, and you want to save for 5 months; that means you need to save $10,000.
You can also use an emergency fund calculator to help you figure out how much to save.
Now, whatever number you come up with might feel overwhelming. So, consider breaking down that number into smaller goals. You can start by focusing on saving your first $1,000. Gradually, you'll beef up that emergency stash to cover your months of expenses.
2. Open a dedicated account
The next step is finding a secure place to save your money, one you have limited access to, such as an easily accessible account that isn't connected to checks or debit cards. This will help you limit your withdrawals so you only take out the money only when needed.
Also, consider saving your money in an interest-bearing account. That way, your money can grow while you save. A high-yield savings account is one of the best that meets all these requirements.
3. Build savings into your budget each month
If you're like me, you've probably tried saving money towards the end of the month after you've spent most of your paycheck. Believe me, I get it! After paying your bills, you want to do something fun with your money.
However, I've learned that the more effective way to save is to make saving money part of your budget.
So add a category for your emergency fund with a dedicated monthly number in your budget. Then, when you divide your money across your bills every month, you can treat your savings like another bill. The key is to see your emergency fund as a mandatory payment you must pay every month.
4. Automate your savings
What if you could save money without even thinking about it? You can with automated savings. There are a couple of ways to set this up.
Through your employer: Many companies offer direct deposit. Check with your employer to see if you can have a portion of your paycheck deposited into your savings and the rest into your checking account.
Through your bank: Most banks allow you to set up automatic transfers. Check with your bank to learn more about the process.
Through savings apps: You use your smartphone for practically everything, so why not save money with it? Savings apps use algorithms and AI to carefully move small percentages of money into your savings. That way, your funds slowly start to build over time. Some helpful apps include Oportun, Qapital, and Chime.
5. Find creative ways to save
While automatic savings will help you reach your goal, if you want to get there even faster, you can try other ways of saving money.
Consider a six-month savings challenge or a no-spend month.
One fun way that has helped me save money is to put aside extra money, such as tax refunds, birthday money, etc. I'm also intentional about saving money from discounts and sales.
For example, if I was planning on buying a new electric toothbrush for $50 but it was on sale for $40, I'd add that $10 to my savings.
6. Make saving fun by rewarding yourself
Now, let's be honest: Saving money takes time, and it can be easy to lose motivation. I know I've had many moments where I started strong and ended up spending my savings on some expensive experience.
So, the key to keeping you on the right track is to reward yourself as you achieve your short-term saving goals. For me, that looks like visiting this special cookie shop in my city. I allocate $5 to buy 2-3 of these decadent cookies.
There are other low-cost ways to reward yourself. One of my favorite things is having a dance party in my living room. I put on my favorite song and dance to it. I even have a playlist ready.
7. Once you reach your goal, repurpose the funds for other goals
After you've reached your goal, make sure to congratulate yourself. Not only do you have money for emergencies, but you have also successfully created a habit of saving money.
To continue your monument, consider allocating funds for other goals, such as a trip, a new outfit, or a new coffee machine.
Remember that you can keep saving once you've reached your goal.
What if you need to leverage your funds?
In a perfect world, nothing would go wrong, and you'd continuously save for as long as you desire. However, the unexpected can happen, and using the money you've saved for a necessary and unforeseen expense is okay.
Remember, that's what your emergency fund is for. Using what you have is better than taking out credit to avoid spending your savings.
Once you've covered your emergency expenses, continue saving as you did before. Don't let a bump in the road stop your momentum.
If you need more support in saving money, check out our completely free courses on different savings challenges.