March 17, 2020
A 2017 report by the Federal Reserve found that 40% of Americans couldn’t pay for a $400 emergency without selling something they own or borrowing money.
That’s a sobering statistic, considering a major home appliance, unforeseen medical expenses, or a new set of tires for your vehicle could easily cost $400.
An emergency fund is exactly what it sounds like. It gives you breathing room in the face of life’s unpredictability. If you’ve ever had one, you know the peace of mind that comes with being prepared.
How much should you save?
Generally, your emergency fund should cover at least three months of expenses. “Expenses” means the bills you must pay in order to live—groceries, gas, your rent or mortgage payment, car payments, utilities, and other bills.
Take a look at your transactions over the last month and tally up the costs of your expenses. Multiply that by three, and that number is your emergency fund target.
Expenses don’t include things you could live without, like your Netflix subscription or your daily purchase at the local coffee shop.
If an emergency prevented you from making money for three months, you would be able to cover all your bills without having to go into debt.
How do I save?
First, find the right savings account
At MVB, we offer several savings accounts that can help you reach your emergency fund goal. Savings accounts offer a higher interest rate than interest-bearing checking accounts, which means your balance will grow more quickly.
A savings account also helps you set aside your emergency fund money, so you’ll be less tempted to spend it.
Determine how big your emergency fund contributions can be
You’ll need to create a budget to discern how much you can contribute monthly to your emergency fund. Here’s how.
- Find your take-home pay, i.e., how much you make after taxes per month.
- Find your disposable income by subtracting your expenses from your take-home pay.
- Add up how much you’re spending on recurring expenses like your cable bill, online subscriptions, etc.
- Add up how much your spending on one-time purchases, like clothing, eating out, etc.
How much money is left? From there, it’s all a matter of how much you’re comfortable with. Some people attack their savings goal aggressively, cutting their expenditures and saving as much of their disposable income as possible. Others pick an amount that largely allows them to maintain their lifestyle and build more gradually.
If you’re starting from $0, set an initial goal of saving $1,000 as aggressively as possible.
Prioritize your savings goal
If you wait until the end of the pay period to contribute to your emergency fund, you’re shooting yourself in the foot. It will likely take you ages to save if you manage to save anything at all.
Make your emergency fund contribution on payday. If possible, set up direct deposit to divert your contribution to your savings account straight out of your paycheck.
If you come into extra money—like a tax refund, a rebate check, or if you find a $50 bill on the sidewalk—deposit that money into your emergency fund.
Cut your costs
According to the Bureau of Labor Statistics, the average American household spends more than $3,000 per year eating out, almost $500 on alcohol, and almost $3,000 on entertainment each year.
Take a look at your transactions from the past month and note what you could have done without. Add up those transactions to see how much money you’re losing through frivolous spending. Is it more than you thought?
You can tighten up your spending by cooking more at home. There are numerous resources online that offer cheap, easy recipes. You’ll probably see more success if you make a grocery list for the week, instead of going to the store every day or two. If you do go out to eat, try splitting a menu item with a friend or seeking out a happy hour discount.
Avoid impulse spending on clothes and other retail purchases you may not need. If you’re tempted to make a purchase, think about it for a day or two to decide if it’s worth your money.
In addition to spending less, do what you can to make more money. Have a yard sale to score some cash for items you’re not using. If you’re able, consider taking on a second job while you build your emergency fund.
Change your mindset
Bad financial habits can be the hardest to break. Saving for your emergency fund might cause you to miss out on social opportunities or give up something that you enjoy.
But most financial bad habits come from a lack of planning. Plan to sit down every week and review the week’s transactions. Check in on your savings account balance to see the progress you’re making. Plan your indulgences, too. For instance, instead of buying that treat from the bakery every time you feel like it, plan to make that purchase on Friday to celebrate another week of financial discipline.
Be patient. At first, your progress will feel painstakingly slow, but trust the process. After a few months, you’ll be surprised at the size of your new nest egg.