We’ve all heard about how important it is to save for an emergency, but it’s difficult to know how much to save and how to get started. This week, I will help you figure out what the right amount of savings is for you and give you tips on how to get started saving.
How much to Save
Generally, it is important to save at least three to six months of living expenses. This means the bills and costs you would need to cover for this time period if you didn’t have a job or income coming in. A few reasons that this amount is important to save up is that it takes on average three to six months to find another job in case of a job loss. If you are self-employed or in a specialized niche, you will probably need even more savings given that it can take much longer than six months to get your revenue stream back. Another reason is that three months is also the typical waiting period for a long-term disability policy to start. Many employers offer some sort of a long-term disability option (and if they don’t, you should strongly consider getting your own), but few offer short-term disability policies. Most of the time, you are expected to cover the costs for the first few months of your disability while the case is being evaluated.
Personally, I don’t like the three to six-month generalized rule because the emergency fund need varies significantly from person to person. For example, if you are a tenured professor, you have a high level of job security so your chance of job loss may be lower than for someone in the private sector. If you are self-employed, it is likely that you would be better off having six months to a year of expenses saved up. We’ve seen this recently in the self-employed space as well as the public and private sectors as the effects of COVID-19 have wreaked havoc on the economy. It’s definitely important to consider job security and what you would do if no income were coming in. This should also include things like unexpected medical bills, home and car repair, childcare, etc. All of these things may change or even increase substantially during a job loss, disability, or death.
Finally, remember this fund is for true emergencies; in other words, catastrophic events that could wreak financial havoc on your financial plan. Most of the time, these catastrophic emergencies are not things that you can plan for, but unfortunately, they can happen. As we continue to live through the current pandemic, it’s important to realize that this won’t be the last time that many of us use or need a financial emergency fund. Therefore, it’s vital to set yours up today and not dip into it for other non-catastrophic emergency expenditures, such as remodeling your kitchen, taking a spur of the moment vacation, or paying off your debt. Set aside other savings for those goals. If you need help deciding how much you should have in emergency savings, consider engaging with a financial professional.
How to Start Saving
Most people know that it is important to start saving, but don’t know how to get started. Let me walk you through an easy way to get saving!
1. Start Planning Your Savings
Each week, if you saved only $5 a day, you would quickly see that savings (without compounding interest) add up to over $1,825 a year! You can see that as you move the amount upward, you could be saving as much as $7,300 per year by simply saving a bit more each day. Right now, maybe $5 or even $20 doesn’t sound like much, but if you were to start saving these amounts, it would quickly add up over time and put you much closer to fully funding your emergency account!
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2. Make it Automatic
A key part of savings is to put it on autopilot and then don’t touch it! For example, if you want to save $5/day, you can simply set up an automatic transfer from your checking account into your designated savings account (this even works if you are saving in a different account outside of your primary bank). You may not want to pull money everyday, but weekly is a reasonable schedule. The total amount will vary slightly given that there are 52 weeks +/- a couple of days (depending if it’s a leap year), but the best part is that you can simply set up the weekly transfer and then forget about it. At the end of the year, you’ll surprise yourself with the amount you’ve saved up without even thinking about it. (Of course, you can do this with a bi-weekly or even monthly transfer as well, but make sure to increase the amount of savings given that you are going for a longer period of time).
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3. Round-Up Savings
The next piece of the challenge can be more impactful than you might think; it’s called “Round-Up Savings” and many banks and credit unions are now offering these options on your accounts. Several apps offer the same feature. Essentially, this technique allows you to round up each purchase to a whole dollar amount and put the change in your savings account. For example, if you buy something that costs $20.19 then your bank or app will automatically round up the purchase to $21. The original amount ($20.19) will go to your purchase, while the extra 81 cents will be placed into your designated savings account. It may not sound like much, but you’ll be surprised how quickly these small amounts add up!
Another Round-Up Savings method that I personally like to use and may work for those who are more willing to save cash is the cashback option when shopping. For example, when you go grocery shopping and receive the option for cash back, select $10 or $20 each time you shop; often, this is a small enough amount that you won’t miss it. Then, make sure and put the cash in a safe place where you know you won’t be tempted to spend it. After two or three months, deposit the cash into your savings account for a little extra boost to your emergency fund. You’ll be surprised by how much you save over time by simply saving an additional $10 or $20 dollars here and there. I’ve been able to save an extra $100 per month utilizing this method. Please note this method will only work if you are not a cash spender. If you are tempted to spend the cash, then I recommend you utilize the automatic savings bank transactions instead.
4. Saving Windfalls or Bonuses
Finally, a great method to really boost your savings is to save at least a portion of your pay raises, windfalls or bonuses. For example, when you receive a bonus at work, instead of increasing your spending amount, simply continue to live off the current amount you make and save the rest. If you are expecting a tax refund, then save it or at least a large portion of it in order to help you store up your much needed emergency fund. Even if you can save at least half towards your emergency fund, you will find that it will quickly help boost your savings amount rather quickly!
We want you to figure out a savings plan that works for you and you will commit to and stick with. You’ll be crossing off completing your emergency fund savings goal before you know it if you commit to saving and utilizing this account for catastrophic emergencies only! Saving doesn’t have to be difficult or painful. Just get in the habit of saving small amounts over short periods of time and you’ll surprise yourself by how quickly you can make your savings goals. We wish you luck on your savings journey and start saving today!