With economic uncertainty spreading across the country, Americans are finding it difficult to keep up.
If an unexpected expense arises, they feel even more financially vulnerable, with 29% of Americans having more credit card debt than they have in savings and nearly one in four having no savings at all.
This is why it’s becoming increasingly important to have money set aside for emergencies. The peace of mind that comes with planning and being prepared for surprise expenses can’t be overlooked.
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While the costs of goods continue to rise and credit card debt has hit record highs, there are three things we can do to be prepared for unexpected expenses in the future.
1. Start small
Between putting money aside for retirement and making sure you have enough for everyday expenses, it might seem as if you can’t afford to invest in an emergency fund.
One of the biggest mistakes people can make with their emergency funds is to start out believing they need thousands of dollars set in it. This isn’t feasible or necessary.
The truth is that every emergency fund begins and is useful with that first deposit.
Financial security isn’t about suddenly having thousands of dollars on hand; it’s investing in the habit of slowly increasing your funds over time. Even something as simple as a few hundred dollars set aside can cover common financial expenses like a minor car repair, a broken appliance or a higher-than-normal utility bill.
If you find yourself stuck with one of these emergencies and you don’t have any money to cover them, these expenses could often end up on a credit card. This leads to debt that will stay around much longer than the emergency itself.
Never underestimate the importance of the first deposit into your emergency fund. It’s a crucial step in creating a financial habit that will protect your future self.
2. Automate your savings
The easiest way to save money is to not be tempted to spend it. While you’re stressed about paying for everyday expenses and investing money into your retirement, saving anything extra often gets forgotten. This is why automating your savings can be such a powerful tool.
Don’t start your savings habit by setting aside whatever funds you have left over at the end of each month, because many times, there is often nothing or very little left.
Making things automatic creates a set-it-and-forget-it mindset where you save first and spend what’s left. When you schedule this automatic transfer every month, you are telling yourself that this emergency savings account is a priority instead of an option.
One of the most overlooked benefits of automatic transfers is that you are removing the emotional side of it. It is likely that every month will bring a temptation to buy yourself something.
Maybe you’ve had your eye on a new TV or a band you have been wanting to see is coming into town. If you look at your account and see “extra” funds, it appears you can afford to spend the extra money, when in reality, you can’t.
If it goes into your savings accounts as soon as your paycheck hits, your spending decision has been made for you.
Many of my clients have found that once money is transferred automatically, their spending habits begin to adapt to this normal remaining balance.
3. Invest in a high-yield account
While it’s best to keep your emergency fund in an easily accessible account without withdrawal penalties, that doesn’t mean that you can’t still earn interest on your funds.
While traditional savings accounts can be a good place to start, this might be an opportunity to research high-yield savings accounts. Look for accounts that offer high interest rates, such as a money market account or an online savings account.
Traditional savings accounts generally offer rates from 0.01% to 0.02%, while high-yield accounts pay higher than 4%, with some rates higher than 5%. That means if you deposit $10,000, you’ll have an additional $500 in one year without doing anything else.
Unlike the investments that you might have for retirement, where there are taxes or penalties for early withdrawals, funds in high-yield savings accounts are generally available immediately when you need them. If there are a few months when you aren’t able to actively contribute to the account, the money in it is still growing.
While the interest alone isn’t going to help cover all of your emergencies right away, they provide that extra boost that requires no effort from you.
When you start your emergency fund, instead of focusing on a goal that could be years or months away, concentrate on achieving smaller objectives. Break it down into smaller amounts that don’t seem too overwhelming.
- Goal No. 1: Save $200
- Goal No. 2: Save $400 more
- Goal No. 3: Save $800 more
- Long-term goal: Save three to six months’ worth of expenses
While it might be easy to do, don’t start comparing yourself with others. Everyone is at a different stage in their savings journey.
People who are considered in a positive financial situation didn’t get there through big, dramatic changes. It often starts with small actions that quickly become common habits.