In uncertain times, it pays to be prepared. Safeguarding your loved ones and ensuring your financial security is more crucial than ever. The pandemic was a stark reminder that crises can arise unexpectedly, and several families faced extreme hardship. Unfortunately, many were left vulnerable because they lived paycheck to paycheck and had no savings to fall back on. But it’s never too late to start saving. With just a little extra care, individuals can build a strong buffer against life’s unexpected events.
Having a solid emergency fund means being able to draw on your own resources in a crisis, be it unemployment, illness, or something else entirely. Most financial advisers recommend saving between three and six months’ worth of income. That’s easier said than done, of course, but the good news is it doesn’t have to happen overnight. Here’s a simple, straightforward approach to saving that everyone can follow. By focusing on the fundamentals, it’s easier to set up a savings plan that really works and can be adjusted whenever necessary.
Taking charge of your finances means taking charge of your savings. Whether it’s a little or a lot, one of the most liberating things you can do is start putting money aside today. Saving creates a financial slack that allows individuals to think beyond day-to-day concerns and plan for the long term. The focus here is on building an emergency fund, but once that goal is achieved, it will be easier to save for other purposes, be it a family home, a new car, or a dream holiday.
The approach introduced is deeper than just the customary “Save 10% of your income” mantra. It’s a framework composed of four fundamental components necessary to effectively save and manage funds. Readers will discover how to choose an amount worth saving, how to find room in the budget for it, what to do when expenses exceed income, and how to avoid the trap of over-saving. Go through the steps one by one, and it won’t take long to gather a healthy financial buffer to draw upon in times of need.
Cultivating good saving habits takes time and effort. Once the fundamentals are in place, finances can be left mostly untouched for years or even decades. There will be the occasional need to revisit the framework, of course, such as when income changes significantly. But it’s easy to adjust the plan if the basics are well understood. For those already more or less on top of their finances, this is an excellent opportunity to sharpen the saving strategy or perhaps even help family and friends become financially responsible.
People are often quite good at managing their expenses — it’s natural to spend based on what’s coming in. But when it comes to savings, it’s all too easy to think something along the lines of: “Well, I’ll put aside whatever I can spare.” Problem is, there’s no such thing as spare money. If a household has been living from paycheck to paycheck, spending every last cent, it won’t have money set aside for emergencies. Without a specific target, there’s little chance of ever starting to save. So the first step is to decide how much to save (R. Despard et al., 2020).
Understanding the Importance of an Emergency Fund
Life is unpredictable, and unexpected expenses can arise at any given moment. Whether a medical bill comes up, a tire blows on your car, or something breaks in your home, these charges can leave you grasping at straws trying to stay afloat financially. That’s why having an emergency fund is essential to creating a safety net for financial stability. An emergency fund gives you liquidity when you need it most. Instead of panic and worry, having cash set aside will allow you to handle life’s messy situations with ease. Emergency funds are often used for job loss, medical emergencies, necessary home repairs, or sudden car repairs and accidents (R. Despard et al., 2020). Although it may seem daunting, emergency funds don’t have to cover every expense at once. Even a few hundred dollars can make a difference in alleviating stress during a difficult time. That’s why it’s important to prioritize what you can build instead of becoming overwhelmed by what you think you need. Life is filled with uncertainties, and plans don’t always go accordingly. This is why emergency funds are so crucial. You’ll have more peace of mind knowing there’s money set aside for a safety net rather than being financially vulnerable. An emergency fund protects you from the stresses life throws at you. Without savings, stress multiplies with each worry and to-do at hand. However, having cash set aside makes stressful times more manageable. It’s easy to think, “I’ll save for emergencies down the road,” however, “down the road” becomes longer than expected with life’s distractions. Even a small savings can make all the difference in an emergency. Think of the things in life you don’t worry about because you have a plan. Housing, food, and transportation are likely a few necessities in which you’ve invested time and effort to ensure security. Prioritizing these things is necessary to guarantee financial stability as well. Instead of viewing savings as a daunting task, think of it as simply planning for the future. The future is unknown and inevitable, so acknowledging it will make it easier to do what it takes to ensure security. An emergency fund is a necessity for long-term financial health. Although it may be difficult to envision possible emergencies, think of how the unexpected has happened in the past. From a car accident to a sudden job loss, many situations can occur leaving one in a vulnerable financial position. Therefore, having an emergency fund should be an utmost priority. Having cash set aside makes so many things possible, whereas without it, many doors remain closed. An emergency fund is a foundation for effective financial management. It’s necessary to create savings before considering anything else.
Setting Financial Goals
Building an effective emergency fund starts with setting financial goals. Goals give your savings strategy shape and direction. Bigger goals usually come with a greater price tag or require greater effort to reach. Goals can be divided into different categories, such as short-term or long-term goals. When it comes to savings goals, a common approach is to use the 60-20-20 budgeting rule. Of the money you bring home, allocate 60% for living expenses, 20% for savings, and 20% for discretionary spending (R. Despard et al., 2020). But financial situations differ between people, so it’s important to keep in mind that these percentages aren’t set in stone. The key point is that you should always make sure to save some of your income.
Having clearly defined goals is critical to having a roadmap in place. Without goals, it’s easy to go off track. For example, if someone has been careless with money and finds it difficult to make ends meet, building an emergency fund should be a priority. However, if someone has no debt, their monthly expenses are under control, and they already have some money in the bank, they might start thinking about bigger life goals, such as retirement or a new home. Be SMART when setting goals. This technique helps set realistic and attainable goals by ensuring they are Specific, Measurable, Attainable, Relevant, and Time-bound. Once the goals have been set, figure out which one is the priority. Prioritizing goals helps allocate resources in the most efficient way possible. Ideally, there should be a mix of short- and long-term goals, with at least one short-term goal that can be reached relatively quickly and gives a sense of accomplishment. When saving for specific goals, it helps to set specific, measurable objectives that encourage accountability. An objective like “I want to save money” often isn’t enough; instead, turn it into something like “I want to set aside $5,000 for a new car in three years.” Goals should be reviewed and adjusted if necessary. Life circumstances change, and so do the goals. Priorities also change; what seemed vital a few years ago might no longer be that important.
Creating a Budget and Identifying Areas to Cut Costs
Learning how to build a budget is key to making the most of your money and managing your financial situation. Most people have no idea how much they actually spend each month and on what. Tracking down all sources of income and expenses for at least one month gives you a much clearer picture of your overall financial situation. Once you have everything documented, you can start to look for areas where you can cut costs. Finding ways to save money is crucial for people currently living pay cheque to pay cheque and trying to free up additional funds for savings. Start by looking for places where costs can be cut. Essentials, such as rent or mortgage, utilities, groceries and transportation should always come first. However, there are usually ways to minimize discretionary spending, which includes things like eating out, subscription services, gym memberships, shopping and entertainment (R. Despard et al., 2020).
Setting priorities is important, so try to figure out how to spend less on non-essentials. For example, cooking at home is healthier and way cheaper than eating out. Finding free entertainment options, like outdoor activities, is also a great way to save some cash. Another good tip is to always compare prices before buying something. Oftentimes the same product can be found for cheaper at a different store. It’s also a good idea to avoid impulse buying by waiting 24 hours before purchasing anything that wasn’t on the shopping list. Finally, keep in mind that the more money spent, the more necessary it becomes to make more money. If a successful budget is made, it will be very clear where every dollar is going and how to make better financial choices in the future. The goal is to build a powerful financial safety net as insurance for the future. Budgeting is the foundation of all personal finance and a must-know skill for those wanting to take control of their finances and plan for the long term. Creating a budget will help save money and reach the goal of having a healthy emergency fund.
Automating Your Savings
Saving money can be a powerful technique to grow your emergency fund. If you’re like millions of people, you may procrastinate when it comes to putting money away. On the surface, this makes a lot of sense. After all, money has a way of disappearing if it’s not tightly controlled. However, by taking an “automated” approach to saving, you can ensure that you grow your emergency fund. Luckily, this doesn’t need to be some gigantic, engineered scheme- automating your savings, in fact, may be the most powerful technique in growing your emergency fund.
This technique is exactly what it sounds like. Set up automatic transfers from your checking account into your savings account on a regular basis (R. Despard et al., 2020). Approved! Once the transfer is automated, it occurs without you needing to worry about it. In most cases, transfers can be set on a weekly, bi-monthly, or monthly basis. The most common approach is to transfer money once you receive your paycheck. Once money goes into your savings account, you’ll bypass temptation entirely and you won’t spend money you intend for emergencies. Automating savings is the easiest and most effective way to grow your emergency fund. While you can choose how much to set aside, picking a certain percentage of your paycheck to go into savings is common; the transfer amount can be altered or canceled anytime. Putting away 5% of each paycheck is feasible for most people. But as you start spending more free time on savings, revisit and increase that percentage as your financial situation improves. This might be especially true if you receive regular raises at work or if you have a second source of income, like a part-time job. Once you’ve built up your emergency fund to $1,000, consider expanding that amount to create multiple layers of financial protection.
If you’re currently frantically checking your bank balance after reading this section and wondering if savings can be automated, slow down. Save money anywhere possible! A desire to grow savings usually starts with little-to-no financial slack. Without excess income, saving money is next to impossible. In cases like this, it’s best to focus on creating some financial slack. Try to minimize expenses. Automating savings accounts can happen through a variety of methods. Most employers offer direct deposit to multiple checking and savings accounts. Simply take advantage of your employer’s payroll department by allotting a portion of your paycheck to go into savings. If this isn’t an option, utilize your banking application- most banks allow users to set up automatic transfers from checking to savings. Pick the day each month that works best for you; the day after paychecks usually works best. Do this enough times, and it becomes hard to justify cancelling.
As you start to build your emergency fund, revisit the amounts you automated. Set up another transfer to occur anytime an event temporarily increases your income, like a tax return, job bonus, or more hours worked. Financial situations are always evolving, and as they do, money should be reallocated- that means growing savings and putting aside money for other goals. The best time to adjust a transfer into savings is immediately after acquiring more income. Lastly, the biggest investment in financial discipline is simply automating savings. With no money in your account, there’s little reason to worry about where it’s being spent. This, in turn, diminishes the emotional load tied to finances. Overall, automating savings is all about simplicity. Financial routines should be designed so doing nothing is the best choice; making decisions or transfers that grow money is always harder than spending it. By creating a routine that automates savings, your time spent worrying about other financial matters can be freed up.
Investing Your Emergency Fund Wisely
Once an emergency fund is established, focus on placing it in the appropriate investment vehicles. Usually, emergency funds should be as accessible as possible. However, leaving them in a standard checking account creates little to no growth. Finding the balance between accessibility and growth is key to ensuring an emergency fund remains liquid while also maximizing returns. High-yield savings accounts and money market funds are examples of great options for an emergency fund that could help earn a higher interest rate than traditional accounts. Either option allows quick and easy access to funds, keeping them safe from any long-term commitment. The money market fund should be a high consideration, as it offers similar features to a savings account but with slightly higher rates typically. Just ensure it’s a no-penalty withdrawal fund and not one that locks in the investment for a set period (R. Despard et al., 2020). The goal of an emergency fund is to have money available for emergencies, so avoid anything high-risk that could jeopardize that availability. This includes staying far away from stocks or any other assets that could take time to cash out. In fact, probably the best investment for an emergency fund is to keep it in an account that earns interest but has no penalties for withdrawals. It’s still a good idea to review how well the fund is performing regularly. Even with the safety net’s benefits, it’s easy to let it slip your mind. Ensuring that savings and investments still align with financial goals is important, and that includes emergency funds. There’s a strong emphasis on making sure the emergency fund is set up properly, but it’s important to remember that the primary goal is to have that fund there for emergencies. While growth is better than nothing, it’s important to keep in mind that the purpose of the emergency fund is safety and stability. Understanding risk tolerance and time horizon is key to determining how, or if, other assets are invested. In short, the fund’s purpose should steer most of the decision-making process. Wisely investing an emergency fund leads to better financial resilience overall.