One of the essential pillars of financial independence is a six to 12-month emergency fund. Depending on one’s risk tolerance and priorities, a large down payment might be a suitable use of funds. Here are several quick tips to get you started:
Scale back any discretionary income into unexpected receipts, such as tax refunds, birthday or holiday gifts. Set up automatic transfers from checking accounts into savings or money market accounts for easy savings plans.
Set a Goal Ben
Franklin would say ‘the only certainties in life are death and taxes’ – but he didn’t count money emergencies, which can pop up out of nowhere. Having an emergency savings account is one way to guard against unexpected expenses. A cushion like this can prevent you from taking on high-interest debt or credit charges when life throws you curveballs. To start an emergency fund, you need a goal. Make it being able to save three or six months’ of monthly living expenses. That amount of savings will help protect you should a crisis cause loss of your critical income, and it will prevent you from using credit cards or raiding your 401(k) for nonemergency needs. It won’t happen overnight: while meeting monthly goals is important, you can set up automatic transfers a few times a month from your checking to your savings or money market account as another way of reaching the goal faster.
Set Up Automatic Transfers
The experts suggest retaining a savings reserve of three to six months of the household expense (the more dependents and the more unstable the income, the higher the reserve). Start with a small goal and let it grow. After an unexpected expense, you can always expand your range as long as the account can sustain an unexpected sequence of spending! When you identify your goal, set automatic transfers that start pulling funds into your emergency fund with each biweekly or monthly paycheck – you won’t miss the funds, and you won’t have to remember to contribute! Add savings by reducing non-essential spending (ie, $5 morning lattes or $10 daily takeout), or bring in extra cash by a side hustle or refinancing loans like your mortgage, student or auto debt. Add financial windfalls like tax returns and work bonuses into emergency savings accounts with no fees or minimum balance so that, when tax returns or bonuses are received, they’re still liquid for when you need them.
Set Up a High-Yield Savings Account
Perhaps most shockingly of all, families report that they do not have sufficient amount in their emergency savings funds to cover unexpected expenses in the event that something does happen.1 A tried-and-true formula is to set your savings target at three to six months’ of expenses, and that can seem like a distant prospect if you are just starting out or finding your two paydays apart. Whatever the goal, dedicated any small amount each week, or with every paycheck to the account. Set up any unexpected windfalls — tax refunds, rebates, or work bonuses — to save to an emergency savings fund. At least part of the emergency savings should be put into a high-yield savings account that offers a high interest rate with few or no fees, and a checking account that provides a competitive interest rate and is linked to a savings account. For those who don’t like bank accounts, some banks offer money market accounts that offer competitive interest rates with checking. Alternatively, a safety net might also be comprised of CDs, which safeguard cash for an indefinite period of time with few or no penalties for withdrawals.
Keep It Safe
It can give you the peace of mind you need knowing that you’ll be cushioned from financial emergencies, and allow you to avoid accumulating costly personal loans or credit card charges. Set realistic, incremental, time-bound targets that will take you from zero in savings to your goals. If the goal is to save enough to cover three months’ worth of living expenses, then each time you set an incremental savings target – say one month, then two weeks – your sense of achievement will keep you motivated. You’ll build some savings momentum as well. Another: automatic direct deposit or savings accounts linked to your pay cheque so you don’t have to do anything other than receive your pay. These accounts should be FDIC-insured so your funds are safe until needed – but that’s one less thing to worry about when you’re out of touch.