How much should you save?
Financial advisors encourage people to save three to six months’ worth of living expenses.
That’s no small feat — especially if you’re already working to pay debts and repair your credit.
No matter where you are in your financial journey, take the pressure off of yourself. Emergency funds aren’t built overnight.
While aiming to accrue several months of savings, start wherever you are.
So whether you decide to add $1 a day, $10 a week, or simply aim to set aside $500 over the next few months, you’ll be making tangible progress.
Why should you save for an emergency fund?
There are many great reasons to build an emergency fund.
From a purely emotional standpoint, an emergency fund could provide the quiet confidence that comes from knowing you can handle unplanned expenses. Though, peace of mind is perhaps the most prized possession of all.
An emergency fund may also be your best ally in paying down old debts (and avoiding new ones). With enough money set aside, you might be able to absorb unexpected costs without needing to take on additional debt.
Ultimately, emergency funds have tremendous value for one-income families, for contractors and self-employed entrepreneurs, for individuals with serious medical conditions, and for anyone who is saving for a substantial life goal. Anyone could benefit from an emergency fund.
How do you start the savings process?
There’s talking about it, and then there’s actually doing it.
Here are a few ways to get the ball rolling:
- Know your overhead. Start by calculating your essential monthly expenses, including everything from your rent to car payments, utility bills, groceries and more. Any non-essential items that can be avoided or canceled — like movie tickets, dinners at restaurants, or streaming service subscriptions — do not need to be on this list.
- Set a (specific) goal. If you’re already saving money in your 401(k)/IRA, then you’ll need to adjust your strategy to incorporate your emergency fund. While it may seem overwhelming to juggle multiple types of savings at once, remind yourself that you’re protecting your future with every dollar you put away.
- Go automatic. If your employer provides direct deposit, ask your bank to put part of your paycheck directly into the savings account of your choosing.
- Adjust your tax withholdings. If you receive a hefty tax refund each spring, you could consider investing part (or all) of the money in your emergency savings account. However, because the tax refund is essentially an interest-free loan, you might be better off adjusting your tax withholdings so you can keep more money in your paycheck.
Once you establish sound savings habits, you can apply them to anything.
So, after you reach your emergency savings goal, you’ll be able to move on to other types of savings strategies — like setting aside money for a vacation!
Ultimately, your credit card is an important tool that provides financial freedom.
However, it’s not meant to be swiped in every financial situation. Instead, it’s designed to be used strategically — to help you get what you need, to make payments on time, and to build credit along the way.
That’s why it’s essential to have an emergency fund that stands between you and your financial health. It’s a safety net that cushions the blow of unexpected costs and protects you from getting overextended or worse.
Most importantly, it’s the financial strategy that encourages you to invest in your peace of mind — so you can withstand emergencies with confidence.