You may be wondering, what are some ways to build an emergency fund in 2020? I’m a big proponent of having an emergency fund. Many people assume that you only need an emergency fund if their job isn’t secure, or worse think they are above having one. One of the most important lessons I ever learned was to hope for the best and prepare for the worst. In fact, did you know that 25% of Americans don’t have an emergency fund at all, and only 23% of Americans have enough in savings to pay 3 weeks of bills? Those are some scary statistics.
Today, I’m going to be talking about how much money you should have in your emergency fund (sometimes referred to as a rainy day fund), breaking down the basics of an emergency fund, and 5 ways to build an emergency fund at every income level.
One thing that’s for certain, you better start thinking about an emergency fund today if you haven’t already. Without further adieu lets go ahead and dive into everything you need to know about an emergency fund today!
What exactly is an emergency fund?
An emergency fund is money (or liquid assets) that is readily available to help during financial hardships. These financial hardships include difficult times such as a loss of job, an illness, a major home repair, a recession, or even worse a pandemic like the coronavirus.
The main purpose of having an emergency fund is to create a safety net that can be used during one of the emergency situations listed above. This safety net is one of the most important reasons to have an emergency fund. In addition, by having an emergency fund, you will reduce the temptation to carry credit card debt, take out a loan, or even withdraw from your 401k causing a huge penalty.
I know it is tempting to want to dip into your emergency fund, but don’t. Leave it alone, pretend it doesn’t even exist. When I’m looking at my financial situation and calculating costs and bills, I don’t even take into consideration my emergency fund.
How much should I have in my emergency fund?
One of the best lessons my parents taught me as a rule of thumb was to always have 6 months of an emergency fund built up. You may be thinking wow 6 months of money in cash is a lot of money. While this is true, you will be thankful you did it when a recession hits or even worse if you happen to get laid off from your job.
6 months will be able to keep you and your family afloat until you are able to find a new job. While it may not take you 6 months to find a job, at least when you prepare to have 6 months available to you. I know that many financial institutions recommend 3 months, but I’d rather have 6 months available just in case.
5 Ways to build an emergency fund
As I mentioned above you want to have 6 months of savings in your emergency fund. You may be thinking yeah, I understand the concept but how do I save for an emergency fund 6 months? Below are 5 ways to build an emergency fund even if you have a low income or salary. The first step is calculate how much you need to save for 3 – 6 months. For this example
Set money aside every month – Every paycheck set money aside that can be added to your rainy day emergency fund. Sometimes this up to be moved automatically from your paycheck. Many banks even allow you to have separate savings accounts within the same bank account.
Save your tax return – Another great way to build your emergency fund is during tax season. I know it’s tempting to want to go out and spend your tax refund money, but don’t, add it to your emergency fund. Also, the government just announced with the coronavirus you will be receiving money from a stimulus package. Of course, if you need to spend it, spend it, but if you can save it that would also be a great amount to add to your emergency fund.
Cut costs – See where you can cut costs to build your emergency fund. I was able to limit the amount of times I went out to eat while building my emergency fund. Instead of going out to eat twice a week, I went out once a week.
Keep your money in a high interest money market account with – let your emergency fund accrue interest.
Cancel any unneeded / unused subscriptions – If you are like me you probably pay for tons of different subscription services, hulu, nextflix, calm app, etc. If you cancel a few subscription base services you can use that money to contribute to your emergency fund. Cutting subscription costs can save you hundreds of dollars a month
Recap on how to build an emergency fund
Building an emergency fund is simple if you follow these steps: 1. Create a plan and stick to it, Save your tax returns, cut costs and understand the difference between essentials and non- essentials, have your cash grow in a safe investment such as a CD or high interest account, and finally,
In conclusion, make sure you treat your emergency fund like a normal bill. If you do this little trick it will help you continue to save and build your emergency fund. I’d love to hear in the comments below how you built up an emergency fund or saved for the recession.