If your mantra for the year is to jumpstart your emergency fund then read on!
There are a number of reasons why you might have chosen to bump up this financial goal high in your priorities for the year. It could be lessons of the past few years that forced many families to rein in their finances. The pandemic was an eye-opener that shifted the focus on financial stability. And a big cornerstone of that topic is your emergency fund.
What is an emergency fund?
Your emergency fund is money you set aside now so you have an amount you can use in future emergencies. The fund’s strength relies on how much you are able to save now. The stronger it is, the longer you can rely on it to cover your basic household expenses. This gives you enough time to strengthen your finances again.
When talking about an emergency fund, you could come across some terms closely related to it. Some of them are rainy day funds and even reserve funds. These are all part of the same conversation and have almost the same function. The distinction between these terms is how they are used to help you achieve financial security during your times of need.
Think of it this way – your reserve funds consist of your emergency fund and rainy day fund. Now, your rainy day fund is used for small unexpected expenses. This could be a broken light at home or getting the lawnmower fixed. But your emergency fund is for the bigger needs like losing your job or a health scare you had to address immediately. This way, your emergency fund remains intact even with constant small needs popping up.
Jumpstart your emergency fund with these tips
Now that you know the basic definition of what an emergency fund is and how to differentiate it from other funds, now comes the question – how can you jumpstart and save for emergencies this year? Here are three things you might want to keep in mind when taking on this task.
Tip No. 1 – Understand How Much You Need
This is perhaps the most important part of the whole process. Before you even begin to save up for your emergency fund, do you have an idea how much you really need? If you are able to identify the amount at the beginning, it gives your effort a much-needed direction. This will help you focus and increase your chances of success. On average, BLS mentioned that the average household expense is at $5,577 per month.
If you look it up online and search for the ideal emergency fund amount, you will be flooded with several figures all telling you the same thing – you need to have that to help you get through a financial crisis. But the goal at the very beginning is to get started. So target an amount you can quickly save within a span of a few weeks or months. It can be $100 or even $500.
Once you reach this, it is a mental win for you and it can get you started. You know dig deeper and look at your household budget to understand the exact amount you need. Since your emergency fund is meant to cover your basic expenses, add all those up from your budget. Once you have that figure in mind, aim to save months’ worth of that over a period of a year. It can be 3 months, 6 months, or even 9. This means that if you are unable to earn any income, that is the number of months you have to start putting money in again into your budget. The more you have, the longer time you have to work with.
Tip No. 2 – Work the amount into your budget
Now that you have an idea how much you need, you need to work that figure into your budget to help you jumpstart your emergency fund savings. It will also help you identify exact dollar figures and how much you need to set aside every payday. This is a huge boost for you because you now have something concrete to work on.
This is because oftentimes, people just set aside whatever amount they have at the end of the month for emergency savings. This makes it an erratic approach and shows that you do not value what you are doing. But if you are able to identify the amount in your budget, you do it consistently. You can even think of it as a payment where you forget the amount every month.
As mentioned, working the amount you need to save into your expenses every month sustains your effort and builds consistency. This is why it is a good idea to start with a small goal first. More than the amount, you are training yourself to be more intentional with your savings. Over time, it becomes second nature to you and you do it automatically.
Tip No. 3 – Do not dip into the fund for impulse purchases
You might be able to jumpstart your emergency fund savings but if you do not use it well, there is a good chance that you won’t have enough when the time comes that you need it. There are times when you are able to convince yourself that you are in an emergency and justify using what you have saved for unnecessary spending.
It is a good idea to identify early on what constitutes an emergency. Start with events that have the ability to impact your income negatively. It can be losing your job or even getting sick. It can be emergency travel for family and friends. If you are able to identify these instances early on, then you can use your emergency fund wisely.
One thing you can do if there are expenses that fall into your “wants” category is to save up for them. Rather than dipping into your emergency fund, set aside an exact amount every month to help you make that purchase. More than keeping your emergency fund secure, you also get to think about the purchase if it is something you really want over time.
Remember that the tips mentioned above can help you get started and allow you to jumpstart and help you strengthen your emergency fund for the year. But you still need to take a close hard look at your current financial situation.
Common obstacles when trying to jumpstart your emergency fund
Challenges will always be part of life. This is true even if you are trying to get ahead of your financial needs with your emergency fund savings. That being said, it is a good idea to try and get ahead of some of the most common obstacles in your way. By knowing these challenges along the way, you can be prepared with a ready solution.
Being unaware of its role in your financial health
You will surely have a difficult time trying to jumpstart your emergency fund savings if you fail to recognize its role and significance. First off, you will not have the drive to save if you do not feel the need to save. You might have other priorities you want to focus on for the year and your emergency fund is not one of them.
This is one of the most common problems a lot of people have. Although common, it is not always that easy to address. First off, your priorities always depend on your own set of challenges and experiences in life. But one way to help you get started with your emergency fund savings is to look at how it can affect your priorities in life.
If your target for the year is paying off the house, then an emergency fund can help you do that. It can help give you peace of mind in knowing that you will have the amount you need to keep paying even if you get into emergency situations. The goal is to make sure you see the value it can bring you even if you have other priorities for the year.
Too much debt
It is tough to take on a financial goal at any point in your life if you are riddled with debt. CNBC even shares that the average American has over $90,000 in debt. But it does not mean that you cannot plan for other things in your life including saving up for an emergency fund. There are a few payment strategies you can look into to help you manage your debt payments and have better control over them.
One of them is debt consolidation where you combine and put your payments under one account. What it does is help you manage and keep track of your debt payments especially if you are juggling several accounts from multiple lenders. If your credit score has improved over time, there is also a chance you can qualify for a lower interest rate for lower monthly payments.
You can also make use of a low-interest or zero-interest credit card to help you consolidate your debts under one account. But take note that these types of cards usually have a promotional period with them. This means that you only have a limited amount of time before you can pay it off. After which, the interest rate goes back to normal. So it is better to pay everything off before that happens.
People around you keep borrowing money
It is not easy dealing with people borrowing money from you especially if they are family and friends close to you. But it comes down again to making sure you and your family have what you need when the time comes. You also have to think about emergency situations where your income could be impacted and your expenses start to pile up.
But this is not to say that you ignore or decline every request to borrow money. But one thing you can do is to start taking on a very different mindset when lending money. One thing you can do is treat every request as a gift rather than a loan. There is a good chance that you might not be able to get that money back when they borrow it.
That being said, you now get to decide how much you can afford to give. If there is a chance that you won’t be able to get it back, that amount significantly goes down. And you lower your stress level as well not thinking about when you are going to get the money back. It also helps you retain that relationship with the person who is borrowing money.
Crossed lines between wants and needs
When it comes to your expenses, there is a fine line between your wants and needs. And oftentimes, people tend to cross over from both sides unconsciously. They only notice it when they start looking at their budget. They notice that they overspent for some expense items thinking they are still within budget. Has this happened to you?
This is a common problem for a lot of people who are trying to get started with their savings goal. But there is a way to help you keep you interchanging your needs and wants. It involves creating a detailed list of your needs and sticking to them. When you feel tempted to buy other than what is on the list, you save up for it. This way, you stick to your budget and save for your emergency fund as well.
Not having a household budget
Your household budget is one of the most important financial tools you will ever use. It helps keep you aligned with your goals. Your budget gives you the ability to track your spending as well. It also lays out all your expense in a month. All these are crucial benefits that give you the upper hand in managing your finances properly.
If you are serious about saving up for an emergency fund, having a household budget is a must. It shows you what you need to set aside each month. The budget also lets you know if you are on track with your savings or if you are already veering off-course.
It is tough to jumpstart your emergency fund savings but there are ways to help you make that first step.