Have you ever had an unexpected medical bill pop up that threw off your monthly finances? Perhaps your car broke down without warning, your cellphone was stolen or your washing machine took a turn for the worse on the same day your mortgage payment or rent was due. Did you have an emergency fund tucked away to cover the unplanned expense, or did you have to turn to credit to make ends meet?
Having a financial safety net in place is rare these days. 62% of Americans have less than $1 saved and 47% of Americans are unable to cover an unexpected expense of $400 dollars out-of-pocket without borrowing money or selling something.
In today’s spending economy, companies and brands are making it increasingly easier to spend money and harder to save. Store credit cards are incentivized with substantial savings opportunities and are aggressively pushed to consumers during check out. Debt has become commonplace in most households, but a credit card is not an equal alternative to a savings account. Debt has a cost, requires monthly monitoring and payments and can impact your credit score if you get those payments wrong or spend too much. Putting some savings away make it possible to weather life’s “little storms” without needing to take on additional credit card debt or other loans.
What is the simplest way create an emergency savings fund? Start small and aim big by following four easy steps.
- Figure Out How Much You Need to Save Your emergency fund should be enough to cover your regular expenses for three to six months. Monthly expenses will vary wildly per individual but likely include rent/mortgage, car/transportation, electricity, water, cellphone(s), and your monthly food spend.
- Set Up a Specific Account for Emergency Savings These funds should be saved be in a separate account. It will allow you to easily set up an automatic contribution and it creates an additional barrier to removing the funds from the account. A separate account also makes it easier to track your progress overtime. Look for accounts that provide extra benefits — i.e. a high interest rate or a rewards account (one that offers points, cash, additional products, etc.) – that will give you more bang for every buck saved.
- Automate Your Inflows The easiest way to make sure you continue to make progress is to automate your contributions. This can be as easy as linking your new savings account to your checking account and creating a monthly transfer. Better yet, you can designate a portion of your income to be directly deposited into your emergency savings account. Consistency, even with small deposits, is the best way to grow this balance. There are new tools in the financial technology space that will even do the work for you by analyzing your income against your typical spending and automatically saving what you can afford.
- Keep it Fun! Getting excited will help keep you engaged and motivated throughout the process, making it exponentially more likely that you’ll hit your goal. To get on the fast track to creating an emergency savings account, you can set an aggressive timeline, participate in a challenge with friends or set an even bigger number goal than the one you previously estimated needing.
Your emergency savings will serve as the foundation of your financial wellness. From here, you can start set your sights on higher financial goals like investing, planning your retirement, making new purchases and upgrades – whether that means getting a faster car or a new house with a bigger backyard. Plus, once you’ve created your financial safety net, you’ll have peace of mind knowing you are prepared for anything that comes your way.
Nicole Reyes is the Co-Founder and Head of Product and Strategy at Grand, a company dedicated to creating a community of a million savers and helping people live better lives through sound financial decisions.