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Plan For and Build an Emergency Fund

Got a plan to build an emergency fund? It might be a good thing to start. Years ago, while still trying to establish myself as a freelancer, I heard a bloodcurdling sound emitting from my car. It appeared to be the squealing of brakes. And, since brakes are kind of important, I made an appointment with my mechanic ASAP.

The next day they called me with some unpleasant news. My brake pads weren’t the issue. The brake calipers had seized and had to be replaced.

Here’s where things went from bad to worse. It was going to cost more than $400 to repair. And, I didn’t have that kind of cash just lying around — this meant I had to begrudgingly put it on my credit card.

I wasn’t happy about this series of unfortunate events. But that’s life. After all, things break down, and a tumultuous economy could mean layoffs or the loss of clients.

Even more concerning? Many Americans can’t cover these unexpected expenses. In fact, a Bankrate survey found that only 37% of people have enough in savings to cover a $500 emergency.

That was before the pandemic, however. A Marketplace poll shows that 60% of respondents would have difficulty paying for an unexpected expense of $1,000. More striking though, 40% stated that they would struggle to handle a $250 emergency.

If my personal experience and the aftermath of COVID-19 have proven anything, it’s the importance of having an emergency fund. But, how can you realistically plan for and build an emergency plan during these uncertain times?

What’s an emergency fund and why do you need it?

As I’m sure you’ve already surmised, an emergency fund is a cash reserve to deal with unexpected expenses. Some common examples include:

  • Job or client loss
  • Unexpected home repairs or replacement
  • Major car fixes
  • Medical or dental emergencies
  • Last-minute travel

When you don’t have enough cash on hand to cover this unforeseen expenditure, you may have to use your credit card, borrow the money, or even delay the purchase. That means you have to deal with additional debt, interest fees, and possibly penalties if you withdraw funds from something like your retirement account. It’s also stressful and potentially embarrassing if you have to ask for money from friends or family.

Moreover, if you wait until you have the money, a small problem could grow into something much larger. As an example, not replacing brake pads early. That leads to destroying your rotors.

How much do you need in your emergency fund?

Financial experts often suggest that you should have at least 3 to 6 months’ worth of expenses. For business owners, “it’s best to set aside anywhere from 5 months to 12 months worth of expenses,” opines Choncé Maddox in a previous Due article.

Of course, both of these are just recommendations. If you’re more financially stable, you probably don’t need this much. If you have less stable employment, earn variable incomes, or have a medical condition, then have 6 months of emergency money set aside is sound advice.

What if you’re in debt? A $1,000 starter emergency fund is probably the best way to go. You can always add to it when you’re debt-free.

Ultimately, how much you want to be stashed away is up to you. I live by the rule that something is better than nothing. I mean, even just $50 a month adds up to $600 within a year.

How you can plan and build an emergency fund.

When it comes to planning and building your emergency fund, you can use a variety of strategies. But, here are some suggestions you should use to get started.

1. Take baby steps.

“Every financial expert sets some number as a benchmark for emergency funds—anywhere from three to six to 12 months of expenses,” says Kerri Moriarty, head of company development for Cinch Financial. “For most people, that’s just downright aspirational” when they’re trying to pay off student loans, credit card balances, and rent or a mortgage.

As such, just the thought of saving six months or more worth of expenses is overwhelming. To combat this daunting feeling, begin with small goals. From there, you can gradually work your way up to your long-term objective.

“Reduce your frustration and risk of de-motivation by setting milestone goals to work toward,” Moriarty says. “For example, building up $500 in emergency funds, then $1,000, then $2,500 and so on until you watch yourself tracking to one month or three months or six months covered.”

2. You need a budget.

When it comes to financial goals, you need to create and live by a budget. It’s the only way that you can keep your spending in check. More importantly, it can help you determine how much you can afford to put in your rainy day fund.

For some, this can cause a minor panic attack. Just breathe. A budget is simply listing your monthly expenses. That includes both fixed (recurring bills that don’t change like rent) and variable (expenses that fluctuate like groceries).

Add these numbers up to see how much you’re spending. You then want to subtract that from how much cash you have flowing in, i.e., your salary and passive income. Whatever’s left can be put towards your savings goal.

If you need some more assistance with budgeting, check out the following articles:

3. Find more money.

Yeah. Easier said than done — especially in the midst of a pandemic. But it’s out there. You just have to get it.

If you’re stuck, here are some tried and true methods of finding additional revenue streams.

  • Sell something. I know what you’re thinking; thanks, Captain Obvious. But, it’s the simplest way to get some cash fast. List whatever you no longer want on sites like Craigslist, Facebook Marketplace, or Let Go. Here are a few other tips on how to make money online.
  • Keep the change. Whether if it’s literally tossing coins into a glass charge or using a micro-investing app like Acorns, put your spare change to good use.
  • Find an additional revenue stream. Pick-up, a part-time job, launch a side hustle or earn a passive income.
  • Trim the fat. Find ways to save money. Shop around for better deals on insurance, annuity plan and groceries. Cut back the thermostat. Use coupons. Negotiate better credit card rates. And, Cancel unused memberships and subscriptions.
  • Save your tax refund. When you receive your tax refund, place at least some of it into your saving before you spend it.

4. Automate contributions.

Did you spot a couple of patterns in the previous point? If not, it was that several ways that you can make more money are through automatic contributions.

For example, when you download an app like Acorns, it will automatically invest your spending. With your tax return, you have the option to deposit it directly to your emergency fund.

The most popular option is to have a specified portion of your paycheck to be automatically deposited into your emergency fund. Ideally, this should be placed in a high-yield savings or money market account. Other options would be to set up a recurring automatic deposit into an individual retirement account (IRA) or a certificate of deposit (CD) account.

5. When you reach your goal, keep on trucking.

Let’s say that you reached your goal. First off, go ahead and congratulate your bad self! You’ve earned it.

But, that doesn’t mean that you should take your feet off of the proverbial pedal. Readjust and reassess your goal so that you can keep on making contributions. Maybe you can ease off a bit or dedicate more to catch-up.

6. Keep it liquid but not too accessible.

“Your emergency fund should be liquid, meaning you need to keep it in a place where you can get to it easily and quickly,” notes author and financial expert Rachel Cruze. “The best option is a simple checking account or money market account that comes with a debit card or check-writing privileges.” That will allow you to “pay that doctor or mechanic quickly and with no headaches.”

“But make sure you’re not keeping your emergency fund in a place that’s too easy to access,” adds Cruze. “You don’t want to be tempted to dip into it!” Preferably, if you go this route, open up a separate account so that you can’t tap into it so easily.

Here’s a trick I learned from grandpop; use a different bank. Rather than using his primary bank opened up a savings account at a different institution. It was an extra preventive measure to not dip into his reserve.

I’m in favor of money market funds. In addition to being safe, they’re also accessible. But, they’re not as easy to access as a checking or savings account.

7. Don’t leave empty cartons in the fridge.

I know it’s tempting to purchase that new smartphone or go backpacking through South America. But, should you deplete your emergency savings for them? Probably not.

Your emergency fund should only be spent if an expense is unexpected, necessary, and urgent. If it meets these criteria, then tap into your emergency fund. The thing to remember, though, is to refill your stash once your finances have stabilized.

It’s like when you drink all of the milk or juice in your home. You wouldn’t put the empty container back in the fridge, right? Most of us would purchase a new container so that you still have something delicious to drink.

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