33% of all adults in the US have no Emergency Savings. Do you belong to that camp?
Only 23% of Americans have emergency fund savings of 6 months or more. For many Americans, setting up an emergency fund is not really a top priority. With day-to-day expenses, housing payments, utilities, and occasional purchases creating a safety net tends to be last in the pecking order.
The importance of an emergency fund comes to light in bad times. The current global health crisis makes one realize the importance of having an emergency fund to get through these hard times especially if you have been economically impacted through a job loss/furlough. There are things you can do to make sure you’re prepared should the unexpected happen again.
Keep in mind that there’s no need to fully fund your emergency fund in one go. Savings is about creating habits that work with your lifestyle, and starting a dedicated safety net and putting some money aside is a great first step. Read on for some practical ways to help you set up an emergency fund to get you through potentially difficult times such as now.
Figure out how much you need
The first step to having emergency savings is calculating how much you actually need. Financial experts recommend that you have between 3-6 months of living expenses set aside in case of emergencies. I would suggest at least 6 months of savings to cover your fixed costs. Lets further understand your essential monthly expenses:
- How much do you usually take home in net pay after taxes?
- What are your rent or mortgage payments?
- How much do you usually spend on food?
- Are there any fixed bills or payments you must make every month such as an auto lease, insurance, etc.?
An easy formula is :
Target savings amount = 3 x (Post-Tax Monthly Income)
If you’d like to take a more nuanced approach, factor all of your expenses, and multiply that by six. Creating an emergency fund is as much about understanding your own situation as it is about putting money aside.
Create a dedicated home for your emergency fund
An emergency fund should be separate from your regular savings, so having an easily accessible dedicated home (bank account) for this type of goal is crucial. Not only will it allow you to easily withdraw money when you need it the most, but it will help you avoid spending it, or redirecting money to cover other expenses. Even if the total amount you’ve calculated for your emergency fund seems intimidating, setting up a dedicated place to have your emergency fund is an important first step to working towards this goal.
I would suggest an online bank such as Marcus by Goldman Sachs as a home for your emergency fund for two reasons.
- It pays an interest rate, which is significantly higher than regular bank checking or savings account.
- It is an online bank that doesn’t come with an ATM/debit card and funds need to be transferred to a regular account to be accessed. This two-step process of accessing the funds will prevent you from readily tapping into the account for expenses other than emergency related.
Create a schedule to save
Like all forms of saving, starting an emergency fund is about developing a habit of putting money aside. Take some time to determine how much of your paycheck you’re able to comfortably put away to help you meet your goal, and create a ritual of moving money to this account with a regular cadence – perhaps once a month or every time you get paid. It’s completely understandable that in uncertain times your situation might change from month to month, and this could affect how much you’re able to set aside. Even if you’re not able to put away the same amount each time, having a schedule will help you take things one day at a time, and develop a healthy habit of saving money.
While you might want to layout a more complete roadmap and timeline to help you figure out how to meet your goals, do so only if you feel comfortable with the parameters. Deciding that you want to reach your emergency fund goal by a certain date might help you stay organized, but it shouldn’t be at the expense of your financial well-being. If the unexpected happens, and you need to dip into your emergency fund, know that it’s okay. You can always start saving again once your financial situation stabilizes, after all, that’s what emergency funds are for.