How to Build an Emergency Fund
Life happens. But it’s impossible to predict how and when emergencies will happen. Medical bills, home repairs, a job loss, an unexpected injury, even rent expenses, can suddenly become an unmanageable cost if you have no emergency fund to fall back on. Lack of a financial safety net can send you into a vicious cycle of debt that may take years to overcome. In order to build a strong foundation for your financial wellness, it’s imperative that you create an emergency fund.
As of May 2020, nearly 20 million Americans have still not received their stimulus checks from the government, leaving them empty handed with bills to pay and no emergency fund for support.
According to a recent poll by Bankrate, nearly four in 10 Americans would borrow money in some capacity if hit with an unexpected bill.What’s even more unsettling is among respondents who reported that they or a close relative paid for a major unanticipated expense in the past year, the average cost was $3,518.
Although it’s easy to consider Americans to be financially diverse, there’s a common denominator most households share, being unprepared to absorb a financial shock. It’s a wide misconception that financial shocks are limited to lower-income individuals. The truth is, people of all income levels encounter unexpected financial burdens.
What Research Found
In fact, according to a study conducted by The Pew Charitable Trust:
- 60% of households experienced a financial shock in the past 12 months.
- Nearly 1/3 experienced two or more types of financial shocks.
- After suffering a financial shock, households had lower savings and higher credit card debt than those that did not have one.
For the majority of us, encountering an expensive emergency is inevitable. That’s why it’s important you’re prepared. Building your emergency fund is an essential part of planning for your financial future. It means that you won’t have to accrue credit card debt or resort to predatory lenders for quick cash when unforeseen circumstances arise.
So, here’s what to consider when building your emergency fund.
Have at least 3-6 months of basic expenses saved.
At first, this sounds daunting, but set small goals that you can achieve in milestones. It’s not possible to do this quickly, so approach your goals with a realistic timeline of when and how you can achieve this. Having six months of basic expenses in your back pocket can save you months, or even years of debt.
So how will you do this?
Pay yourself first.
This may seem counterintuitive, but if you fail to prioritize your own finances, you’ll continue to struggle to build your emergency fund. People often make the mistake of waiting until the end of the month to see “what’s left” of their paycheck. Don’t wait, immediately transfer cash to your emergency fund at the beginning of the every month. This article recommends to transfer at least 20% of your income. If that just isn’t feasible, transfer 3%, 5%,10%, whatever you feel comfortable with. To keep yourself accountable, set up an automatic transfer from your checking account to your savings.
Reduce unnecessary costs.
You’d be amazed at how much and how quickly you can increase your savings when you eliminate unnecessary expenses. Do you really need to purchase lunch three times a week? Pack a lunch. Paying for four different streaming services? You only really use one. Check your phone provider, internet provider, and credit cards to see if some of your services provide free streaming or benefits so you can cut some of these costs.
Don’t spend one-time cash opportunities.
Resist the urge to spend your tax refund. Your tax refund is not free cash, it’s money you’ve worked hard for and earned, so make sure you put it into your savings. Even if you find yourself with an extra fifty dollars for helping a neighbor move, babysitting, or selling old furniture, don’t spend it – save it! It’s cash flow outside of your income, so you won’t miss it.
Your employee benefits
Employers can’t force employees to start building emergency funds, but they can provide them with helpful financial tools to improve their financial well-being. Your employer may offer a financial wellness program already or provide resources like financial counseling.
In fact, more and more employers are considering the holistic benefits of financial health in the office. In the last two years alone, 35% of companies have increased spending in this arena, and 59% of HR teams are increasing time spent supporting these benefits. These programs are an efficient, cost-effective approach to employee engagement, boosting productivity, and even improving employee morale. Promoting alternatives to high-interest rate payday loans and tapping into retirement can be a saving grace for employees who struggle with their personal finances.
Create a budget to keep track of your spending habits. Outline cash flow coming in and going out each month, and reduce costs where possible.
When you remove any frivolous spending habits, you’ll notice a difference within weeks. Pay attention to price tags you may have previously overlooked. Purchasing cheaper alternatives to everyday items can add up to a hefty savings overtime.
Learn More About Financial Wellness Programs
TrueConnect is a voluntary financial wellness benefit that puts employees first. TrueConnect allows employees to access affordable, low-risk loans without the need of a credit score. It costs nothing for the employer to implement and can be entirely automated through payroll deductions.
To learn more about how you can take the first step towards promoting financial wellness in your workplace, watch our on-demand demo.