In Case Of Emergency: Best Practices For Planning For The Unexpected
The only way to prepare for the unexpected is to understand that the unexpected is bound to come sooner or later. Let’s face it…Mr. and Mrs. Unexpected Expense does not coordinate with our calendars in advance and asks us whether our schedule is conducive for a visit. They would much rather show up unwelcomed and unannounced while also inviting their adult children, grandchildren, dogs, and cats to spend a month at your home on your dime!
According to the Economic Well-Being of U.S. Households in 2020 Report published by the Federal Reserve, more than 25% of adults were either unable to pay existing monthly bills or would be behind on their bills if they experienced one $400 unexpected expense. Likewise, this same study revealed that 66% of Americans would be unable to cover three months of expenses (either by borrowing money, using savings, or selling assets) if they lost their primary source of income. The question is…how do you fit on this spectrum? If you face a $400 unexpected expense, would you be able to pay your monthly bills? If so, could you take it a step further and cover your monthly bills if you lost your regular income for three entire months?
If the answer is no to either of those questions, building an emergency fund is where you need to begin. But where do you start? How do you know how much you need? How do you even begin to put away that kind of money to prepare for something so unknown?
How do you start building an emergency fund?
If your task is to build an emergency fund, the first step is to understand what defines an emergency fund. An emergency fund is a separate saving or bank account used to cover unexpected expenses such as an unexpected illness, accident, job or other income loss, car or home repair, etc. An emergency fund IS NOT a vacation fund, retirement account, or another backup cash account to utilize when you are short on funds before the arrival of your paycheck.
Once you understand the purpose of an emergency fund, it’s time to get to work building one. A general rule of thumb is to maintain at least three to six months of living expenses in your emergency fund; however, that can sometimes be an overwhelming thought. Don’t be alarmed! Below, you find a few recommendations for starting the process of building your very own emergency fund.
Start small. Start TODAY. Building an account with three to six months of living expenses does not happen overnight, but you can’t put it off until tomorrow. If saving is new to you, start by setting aside a small amount of funds every time you get paid. No amount is too small to begin your journey. The important part is that you remain consistent. If you decide to save $10 every time you get paid, put aside your $10 EVERY paycheck and do not touch it. Set milestones for yourself and celebrate every milestone achieved along the way.
Make saving automatic. If your job or bank allows you to set up direct deposits or automatic transfers, take advantage of these options. You are much more likely to build your savings if it happens without the requirement of manually depositing or transferring the funds into the account.
Take advantage of unexpected and infrequent income. Did you get a bonus on the job, an unexpected gift, or some other unexpected or infrequent incoming funds? Please take advantage of these opportunities to bump up your savings when they occur.
Identify “leaky spending” and use your plumbing skills. No one enjoys finding a leak, and there’s nothing worse than having a spending leak! You might be asking yourself, “What is a spending leak?” Have you ever gone to the grocery store to pick up one carton of eggs while you’re hungry? You might get back home with a carload of random snacks that “looked tasty” and cost an extra $20. That $20 unplanned and non-essential expense is a leak. Whether your spending leak comes from the last-minute coffee/breakfast stop on the way to the office, food delivery costs, impulse cash register purchases, or fill-in-the-blank expense, it is essential that you identify these leaks and aim to plug them. Every spending leak that your plugin can convert into progress for your emergency fund goals.
Get an accountability partner (AP). Sometimes it is easier to work toward a goal with someone else. Make a commitment with your spouse, a friend—or an enemy if you have to—and hold each other accountable for saving. Share your goal with your AP and check-in at least biweekly with your progress. Encourage each other to stick with the plan for success.
Evaluate your progress and set new expectations. Once you have begun to build consistency in your emergency fund saving, set up periods to evaluate your progress and set new goals. Perhaps your first goal is to set aside $500. Once you have reached that milestone, it is time to set a new goal. Perhaps you can increase your periodic savings by 5-10% (or more if you are able).
Planning for the unexpected is a journey of consistency. Please don’t get discouraged when it feels like your emergency fund is not building fast enough. Start today, remain consistent, celebrate every milestone achieved, and your savings will continue to grow until you reach your ultimate goal.