We all go through hard times. Whether it’s a personal problem, like losing your job, or a health emergency or a national crisis, like a downturn or a pandemic, we are bound to encounter periods of hardship in our lives. And in times like these, a financial safety net can make all the difference in navigating the stormy seas. But how do you build an emergency fund? Let’s dive into the nitty-gritty of saving for the unexpected.
Build an emergency fund: Step #1 – Plan your budget
There’s no universal recipe you can follow when you want to build an emergency fund. It depends on your income, your savings, how much you spend every month, and what types of emergencies you need to prepare for. An often-quoted rule is to save as much as you would need to manage six months of unemployment. However, for many of us, this goal is unrealistic. It’s something we should all strive for, of course, but you need to take your actual budget into account when preparing for a crisis. That’s why planning your budget is the first step in building an emergency fund. After all, if you don’t know how much you’re spending and how much you could be saving, you won’t be able to put money away for hard times.
Use a spreadsheet to write down how much you spend on:
- Rent/mortgage payments
- Recurring debt payments
- Any ongoing medical services or medication you require
- Fuel for your car or public transportation passes
- Household supplies (cleaning, maintenance)
- Clothing & shoes
- Personal care essentials (shampoo, soap, toothpaste, toothbrush, moisturizer, etc.)
- Childcare, petcare
- Entertainment (cable, streaming and gaming subscriptions, events)
- Dining out
- Non-essential food & household items (snacks, drinks, beauty products, etc.)
- Gym memberships
- Newspapers, magazines, books
- Ridesharing services or cab rides
Build an emergency fund: Step #2 – Set goals based on real scenarios
Once you’re done organizing your daily and monthly spending, it’s time to set goals for your emergency fund based on the crises you could face:
- On a national level, the most likely effect of a crisis would be massive job losses and loss of resources. Economic downturns, pandemics and international or domestic conflicts can lead to these issues.
- On a regional level, the most common type of crisis is a natural disaster. Depending on your area, you could face hurricanes, wildfires, landslides, and more.
- On a personal level, you should consider job loss and health problems.
These scenarios each come with their own tricky calculations. While a pandemic will likely last a few months, downturns can go on for years and are likely to happen around once per decade. When it comes to natural disasters, if you live in a high-risk area, the worst that can happen is not only losing your job but losing your home as well. Building an emergency fund with enough savings for around six months would be ideal for the harshest of times. However, if you aim for just enough to get you through a short rough patch, you can start with one or three months’ savings as a goal, and work your way up from there.
Keep in mind you should build an emergency fund separate from a rainy day fund. If you can, you should manage repairs to everyday items or smaller medical expenses with a rainy day fund, where you’ll keep less money on hand.
If you’re having a hard time figuring out how much you can save based on your income and spending, you can get financial advice from experts for free. GreenPath Financial Wellness is a national nonprofit that helps people around the country. They can help you get out of debt, make housing decisions and manage your money.
Build an emergency fund: Step #3 – Start saving
You know how much you’re spending and what to prepare for. Now comes the real question: how will you save the money you need to build an emergency fund? The truth is you will probably need to cut back on some of your spendings if you’re serious about saving. However, if and when the worst happens, you’ll be grateful to yourself for having taken these steps to secure your future.
How to cut back on spending
The first area you will cut back on is the flexible spending section of your budget:
- Entertainment: cancel any subscriptions you don’t use often. For example, if you haven’t opened a streaming app for a week, you might not need it after all. When it comes to gaming, buy physical copies instead of digital ones so you can swap or resell them when you get bored.
- Dining out and ordering in: if you can cook at home, cut down on eating out and ordering in as much as possible, and go for recipes that don’t require unreasonably expensive ingredients. Plenty of food websites have excellent recipes and advice for home cooks, even on a beginner level.
- Non-essential food items: eat fewer snacks, your bank account and your body will thank you.
- Gym memberships: find ways to exercise outdoors or indoors, without going to the gym. If you need guidance, free online resources will help you manage your exercise routine.
- Beauty and personal care products: try to find cheaper alternatives to the beauty products you use. Try out testers in-store to see if you can find a different brand for what you need. Also, compare reviews online and look for products with similar ingredients to what you’re currently using.
- Vacations: book your holidays early to find the best possible deals.
- Transportation: use public transit instead of ridesharing services or cabs whenever you can.
These tips are a great starting point in building an emergency fund and can save you a pretty penny, but you should consider trimming down your fixed costs as well:
- Look for better deals in every area you can. How long has it been since you looked at cable providers? Or since you checked out other healthcare and insurance plans? You should regularly reassess your options to make sure you’re getting the biggest bang for the buck.
- Replace cheap things that break quickly with pricier but sturdier items. Going for fast fashion or cheap furniture might seem like a budget-friendly option, but buying a few high-quality items that will last for years will save you a lot of money in the long run. You can also find quality clothing and furniture in thrift stores, where you can often snatch up one-of-a-kind pieces with minimal spending.
Apps to help you stay on top of your budget
Keeping track of all your expenses and saving goals is a time-draining and challenging task, even for the most experienced of budgeters. Luckily, there’s more than one app for that, and they’re either completely free or offer free plans.
Mint will help you manage your budget daily and create realistic, personalized goals based on your spending habits. You can check how much money you’ll save by cutting back in any category, and keep an eye on how your spending will affect you short and longterm.
Albert monitors your income and your spending in realtime and alerts you when you’re about to overspend. They also have a free automatic savings feature to help you reach your goals. Plus, if you want to invest some of your income, Albert will also create a safe, custom portfolio for you.
Goodbudget uses the envelope method, in which you put your income into “envelopes” based on spending categories so you can only spend as much as you planned. You can also track your debt payoffs and sync your budget with your entire household.
Find the app that’s best for you and get saving! If you keep track of your expenses, manage your budget and get serious about cutting unnecessary costs, you’ll build a healthy emergency fund in less time than you’d think.