If you’re like many Americans, 2020 has taken a bite out of your savings, but even if you were lucky enough to avoid financial hardship, last year should have made clear the importance of having an emergency fund for you and your loved ones.
What Is an Emergency Fund?
An emergency fund is money you set aside to protect you when the unforeseen happens. Think of it as a safety net to help you cover regular expenses like your mortgage, rent, groceries, utilities, car payment, childcare and more when you find yourself unexpectedly strapped for cash.
Why Do You Need One?
No one likes to expect the worst, but unfortunately, life doesn’t always go to plan. According to the Wall Street Journal, 22 million jobs were lost in March and April of 2020, and while the job market recovered a little over half that amount by November, that stills leaves many without a job or struggling to cover bills they may have accrued while unemployed.1
Even if your job is secure, there’s no guarantee you won’t need extra cash on hand for the unexpected. Unforeseen medical expenses, caring for a loved one or large bills associated with unplanned home or car repairs can put you in a precarious situation if you haven’t planned for it.
The Downside of Debt
Debt directly impacts our mental, physical and financial wellbeing. While debt isn’t always a bad thing (e.g. monthly mortgage payments), too much debt can cripple your ability to pay for necessities, ruin your credit score and even result in bankruptcy. As pressure mounts, the added stress can take a toll on your relationships and your health.
Without an emergency fund to see you through, many turn to credit cards to pay for monthly bills. A 2020 survey reported that almost half of Americans have ongoing credit card debt. Of that number, up to 40% are only able to pay the monthly minimum, which means that they’re accruing more debt as they’re now responsible for high-interest rates as well.2
How Much Should You Save?
According to Wells Fargo3, saving enough money to cover at least six months of expenses is a good goal. Of course, everyone’s financial situation is unique, but aiming a little high wouldn’t be a bad thing and you can always reassess as your situation changes. If saving for six months sounds daunting, start small. You can always increase your savings over time and often getting started is half the battle.
Where Should You Keep Your Money?
The most important consideration about where to keep your money is that it needs to be liquid. In other words, you need to be able to access it quickly and easily with no penalties for using it. That doesn’t mean you can’t still benefit a little. Savings accounts with a high-interest rate will accrue a little extra money in your account, and some banks offer other incentives for opening savings accounts including a reduction in banking fees and discounts on travel and other purchases.
Setting a Weekly or Monthly Goal
Your end goal might be to save enough to cover the cost of six months of expenses, but that doesn’t mean you have to do it overnight. Opening an account with just $100 will start you on the right path. For an obtainable approach, determine the amount you need and set a reasonable weekly or monthly goal to get there. You’ll be surprised how quickly your savings can accrue once you get started. To kickstart your emergency fund, try a few of these tips.
Raises and Bonuses
Instead of immediately spending your new-found wealth, put money from raises and bonuses into your emergency fund. Likely, you’ve already learned to live without the extra cash, and these boosts will help you reach your goal much more quickly.
Setting up a monthly transfer from your checking account to your savings account, the “set it and forget it” approach, can be an effective way to keep you on track. Instead of reminding yourself monthly to make a transfer (and facing the temptation of finding other purposes for the money), your bank can set up an auto-transfer that will help you forget all about your little stash until you need it.
Saving Programs and Apps
From “Keep the Change” bank programs to apps designed to help you save, there’s no shortage of ways to get started and keep the habit going. Some are designed to round up the cost of recent purchases to the nearest dollar and transfer it automatically to your savings account. Others offer budgeting tools and goal trackers to motivate you.
It’s important to do your homework no matter which app or program you choose, since some come with fees attached or offer interest rates that aren’t as competitive as their counterparts. Still, if you’re the type of person who can benefit from a little outside help to keep you on track, there are plenty of budgeting and saving tools to give you a boost. Here’s a recent overview from NerdWallet of just four of the Apps available.