No one plans for them. Emergencies are unfortunately a part of life and typically aren’t welcomed with open arms and big smiles. But, getting through a financial emergency is possible, if you plan for them financially. If you don’t, they can add to the stress that most Americans already feel about their finances.
Impact of financial stress
Most full-time workers in the U.S. said they are living paycheck-to-paycheck — 78% of them, according to a 2017 CareerBuilder study. Yet, despite the fact that Americans feel pressure over finances, few are doing anything to alleviate it. That same CareerBuilder study revealed that 56% of the American workforce saves less than $100 a month. That hardly puts a dent in the debt that we, as a nation, have accumulated.
So, how do you get ahead of the rolling boulder?
Plan for emergencies
Sounds like an oxymoron, right? Well, even if you don’t know when they’re going to happen, you can bet at some point they probably will. Cars break down, basements flood, refrigerators break, and emergency room visits happen.
When you’re in an emergency situation, you usually have to get it taken care of quickly and have little time to think about how you’ll pay for it. The goal of having an emergency savings plan is to avoid relying on credits cards or loans. Going those routes will only make your financial situation worse and likely your stress level higher. But building an emergency savings account can feel daunting, especially if you already feel like you’re living paycheck-to-paycheck. So, you need to make an emergency fund a regular line item in your personal budget. For most, that means reviewing what you’re spending and where you can cut.
The bare necessities
As children we may remember our parents teaching us the difference between “needs” and “wants.” The mouthwatering candy bar in the check-out lane may feel like a “need” to a five-year old but it certainly goes in the “want” column under most parenting approaches.
So, it’s good to take an honest look at the needs and wants in our adult lives. Here are the bare necessities we all have in life:
- Debt obligations like car loans, student loans or credit cards
- Emergency fund
Almost everything else is considered optional spending, even if they feel like necessities.
The time to figure out how you’ll handle a financial emergency is not when you’re in it. Do some advanced thinking about what you could give up in the event of a medical emergency or job loss. When doing this in advance, you’ll be clear headed and less emotional. Some natural expenses to consider reducing are: entertainment, dining out, non-essential shopping, gifts and vacations.
Saving for a rainy day
If you know the total amount of your true necessary expenses you can match it against your take-home pay and have a reliable figure for the monthly amount of savings you would need in the event of an emergency. The best way to build up an emergency fund is to create a budget and stick to it. Here are some guidelines to keep in mind:
- Spend less, save more – Increasing your ability to save for emergencies often means reducing what you spend in the first place. Without a sense of what you’re already spending, it’s almost impossible to reduce it. Be honest with yourself by tracking your spending for three months. This means recording everything you spend and categorizing it, separating the needs from the wants. Doing this for three months (versus just one) will give you a better overall idea of where your money goes.
- Anticipate annual or atypical expenses – It’s easier to track and do budget planning when bills arrive monthly. But what about expenses that only come once or twice a year? Don’t let car insurance, homeowner’s insurance or good old Uncle Sam sneak up on you. Try to set aside money each month in a separate savings account for these expenses so you save money for them throughout the year. You’ll be better prepared to face them, and you won’t be tempted to tap into your emergency fund.
- Keep emergency funds for emergencies – It might feel good as you build up your emergency fund, but this accomplishment is not a license to reward yourself. Your emergency fund is not the fund to use for a sale you “just can’t afford to miss.” Emergency means emergency. And remember, if you use your emergency fund for something, you must focus on paying it back as quickly as possible, so money is available for the next emergency.
How much should you save?
This depends on your personal situation, but a general rule of thumb is to save enough to cover three-to-six months of living expenses. Remember, this is on top of any savings you might be accumulating for vacations, college tuition or other expenses. Think about this: If you lost your job, how long would it take you to find a new one? If you have at least three months of savings, some of the pressure will be lifted.
Here are some calculations to make saving feel more achievable:
- Save $10 every week and you’ll have $520 in a year.
- Save $25 a week and that comes up to $1,300 a year.
- Double it to $50 a week and you’ll have $2,600 in a year.
- Saving $75 a week brings your emergency fund to $3,900.
Ultimately, the math you use must fit your current situation, but finding that extra weekly amount might not be that tough. Think of something you spend money on weekly or monthly that adds up to one of the figures above. Some people could exchange a daily latte for $25 a week in savings. This kind of reality check is important if you’re committed to building an emergency fund.
Tools to save
Once you set your savings goal, it’s easy to hold yourself accountable by having that amount automatically deposited into your emergency fund. Some payroll systems allow you to choose multiple accounts for your direct deposit paycheck. If your employer doesn’t offer this, set up an automatic transfer at your bank that correlates with your paydays. You can specify a certain amount to transfer from your checking to your emergency savings on a monthly or biweekly basis, depending on how often you get paid.
Implementing a system like this also takes the decision (and temptation) out of the process. After a while, you likely won’t even miss the amount that’s being deducted from your paycheck and your savings will build up automatically.
Take the 52-week challenge
Here’s a simple challenge that can pay off big. Save $1 the first week, $2 the second week, $3 the third week and so on. By the end of 52 weeks, you will have saved $1,376 for your emergency fund! Ask a friend or family member to join you in the challenge so you can motivate each other.
You may not accomplish your ultimate emergency savings goal in a year, or even two years, but start small and don’t give up. Setting aside even a small amount with every paycheck will soon add up and get you into the habit of saving.
The important thing is you’ve started saving something. So long as life’s forecast doesn’t include immediate rain, you’ll have an umbrella of savings to protect you from the next emergency.