June: Saving More and Building An Emergency Fund
Saving for a rainy day and building an emergency fund can seem daunting. This month, we will focus on small action steps to make this process more approachable.
Week 1: Identify Your Emergency Fund Goals
There are many different schools of thought about how much you should save in various categories. An emergency fund should be your priority, as it will help you stay on track with all your other financial goals when life goes sideways or unexpected expenses pop up. This week, we will come up with a rough estimate of how much you need in two different emergency funds.
Short-Term Emergency Fund
This emergency fund is for small, unexpected expenses that could cause you to go into debt if you don’t have money to cover them. These expenses could be anything from replacing a tire after getting a flat to paying an unexpected medical bill. Most of us will have some unforeseen expenses every month, and we should add a buffer to our monthly budget for these recurring surprises.
However, it’s essential to have a stash of cash for the pricier surprises that may come up. According to the Federal Reserve’s 2018 Survey of Household Economics and Decision Making, in which some 12,000 households were asked about their financial well-being, 40% of Americans would struggle to come up with even $400 for an unexpected bill.
This is a good number to shoot for when it comes to a short-term emergency fund. However, if you can save more, $1,000-$1,500 is considered a healthy amount. Starting small and building this fund over time is better than not having anything in it at all. Consider your lifestyle and situation and determine your realistic goal.
Long-Term Emergency Funds
This goal is more straightforward to calculate. Long-term emergency funds are meant to prepare for income shocks. You would rely on this money should you or your partner lose your income for an extended time. Experts suggest saving 3-6 months of living expenses. We recommend starting with the goal of saving the equivalent of one month of expenses to help you build momentum.
To calculate this number, add up all of your monthly expenses and identify how much you’d need to cover your essentials if you suddenly had no income:
• Rent or Mortgage
• Car payments and insurance
• Groceries and Utilities
• Credit card payments and any other monthly bills.
• Any other non-negotiable categories, such as pet food, medical expenses, and tuition.
Takeaway: While emergencies are unexpected, we can begin to prepare for the unexpected in advance to cushion ourselves from their negative impact and lessen future financial stress.
For next week: You’ve taken the initiative to calculate your emergency fund goals. Next week, we will review our financial statements to determine areas we can cut back on to free up funds to support these goals.
Week 2: Review Your Financial Statements
This week, set aside 30-minutes to review your bank statements and any other financial accounts you use to pay for any day-to-day items or monthly bills. Before you begin this process, take a moment to get into the mindset of reviewing them as if you were an unrelated third party. What would you think was essential to this person?
Take an honest look at what you see. If you were a stranger looking at your statements, what assumptions would you make about yourself? What is important to this person? Does your statement tell the story of who you want to be, or do you see things you’d like to change?
Next, based on the exercise you just did, identify areas you would like to eliminate or find one or two things you can do to be more mindful.
Do you see a lot of fast-food purchases? A subscription you use sparingly? Are you spending a surprising amount in a specific category? These questions can help you zoom in on what that might be.
Once you’ve identified these expenses, estimate a reasonable dollar amount that you could save if you eliminated or reduced them over the next month. We’ll use this information next week.
Takeaway: Our financial statements can often be very telling; They show what’s important to us and where we may be irresponsible or careless. Reading the story they tell about our habits and priorities can be difficult, but reviewing them with an open mind can also be a catalyst for change.
For next week: Now that we’ve identified areas to save, how about a little challenge?
Week 3: Challenge Yourself
Now that you’ve reviewed your statements and taken inventory of your habits and holdups let’s build momentum by taking swift action with a challenge. Try one of the following challenges this week to build momentum quickly when it comes to freeing up money that can go toward your emergency funds:
1) Don’t spend money on food. Eat only what you have on hand. Get creative and remind yourself that you can do hard things, and this is only one week of your life. Pack your lunch, bring snacks, and eat that produce before it goes bad. We bet you have more food on hand than you realized.
2) End one subscription. This will give you automatic savings each month.
3) Only spend cash this week. Unlike swiping a card, spending with cash is a more tactile experience. The psychological impact of seeing your stash of cash dwindle over the week may surprise you and cause you to think more about your purchases.
Takeaway: Focusing on one action step can free up funds quickly. It’s not easy, hence the word “challenge,” but focusing on one thing instead of many can make a goal more obtainable.
For next week: Life happens, and unexpected expenses pop up regularly around any house, but by being proactive, we can ensure they are few and far between, and we are not caught off guard by a new emergency every month.
Week 4: Automate, Automate, Automate
When it comes to saving consistently, automation is a great tool. Manually transferring your funds to a savings account takes up mental space and ongoing time and requires willpower when you may be struggling.
Take thirty minutes this week to set up automatic transfers or payments to your emergency funds. These can be weekly, bi-weekly, or monthly. Your future self will thank you, and you’ll be surprised at how quickly saving has become a habit instead of a chore.
Takeaway: Automation frees up time and mental space, making it much easier to implement a habit and reach your goals!
For next week: Speaking of saving, we will look into other important areas like retirement and investments.