Do you really need an emergency fund (spoiler alert -- yes!)
In my early twenties, I thought I was managing my money pretty well. I would often justify my purchases by determining how much cash I had until the next payday and if I could cover any bills due between now and then. If I had rent and my phone bill paid, and my next paycheck was only one week away, then sure I could afford to splurge on a St. Patrick's Day weekend in Chicago with friends or a new pair of Lanvin low-tops.
Everything was running smoothly and from the outside, I appeared to be a functioning adult, until a pipe burst in the house I shared with my roommate. My method of covering bills between paychecks and spending any money left over to maintain my lifestyle would not cover a $400 or more plumbing expense.
If I had been saving a portion of my surplus income instead of making frivolous purchases, I could have been building an emergency account. This unexpected cost and the subsequent scramble to cover the expenses drove home the fact that if I lost my job, faced a sudden health crisis, or had to deal with any other unforeseen circumstance, I could quickly find myself in a money crisis.
As my career progressed, my income increased. One would think this would make it easier to put money away in an emergency account, but I was a victim of lifestyle inflation. As my checks became bigger, so did my spending. I was gambling with my finances and living life on the edge.
When I met my fiance, who is a very careful and frugal spender, I realized that I needed to buckle down and seriously save for unforeseen costs. I didn’t want to jeopardize my financial wellbeing as well as his. The question remained, how can you bolster your emergency fund when you are conditioned to manage your finances only considering the present?
You should have enough money saved in your emergency account to cover three months' worth of expenses. It is likely that this number can seem unattainable and daunting when you look at your monthly budget. So here are some baby steps to starting an emergency account:
Analyze your budget
The first step is to analyze your budget. Review your budget to determine how much money you have left over after bills and expenses. You should most definitely include any necessary items in your monthly budget, such as rent, utilities, and student loan payments. But let’s be honest, you likely won’t be able to maintain always packing your meals and never eating out again. Nor will you want to forgo every outing with friends or occasionally purchasing a new pair of shoes.
It is important to include likely but not necessary expenses in your monthly budget. A budgeting app can track your purchases and help you get a feel for your hobbies, shopping, and dining habits. By incorporating these expenses into your monthly budget, you will then be able to get a clearer picture of how much “surplus” money you have each month.
Set a savings goal
Once you know the amount of money you have left over each month, you can set a savings goal. If you don’t have any available funds after paychecks, then you need to cut some costs.
It can be difficult to change your financial habits, and it will probably mean a lifestyle adjustment as well. Depending on your past experiences with money and your emotions regarding finances, tightening up your budget may be daunting.
We like to think of handling our money as a rational thing, solely a value, either you have enough to cover an expense or you don’t. However, finances and spending go much deeper than economists would lead you to believe. Our emotions and feelings regarding money are closely tied to our spending habits. As Kate Levinson states in her book Emotional Currency “In our own lives and the lives of friends and family, we witness confusion, fear, pain, strength, love, creativity, and generosity as we and they face financial uncertainties as well as successes.”
In order to come to terms with your spending and budget, you will have to grapple with some tough feelings surrounding your spending mannerisms. For a set period, say one month, try to go on a money diet. See where you can reasonably cut a few indulgent “budget carbs.” Is your daily coffee run draining your budget? Do you spend too much mindlessly internet shopping?
You may also have to slash some heftier expenses as well. If you are living in an area well beyond your means or driving a car that is financed in part with a hefty loan, consider downsizing, moving, finding a roommate or buying used. It definitely will not be easy overhauling your spending decisions and lifestyle, but if you are living paycheck to paycheck, the difficult truth is that you cannot afford a large unplanned expense.
Once you have created a little breathing room in your budget, set a savings goal. Choose an amount of money that you can reasonably set aside each month towards an emergency fund. You should strive to set aside the same amount each month and include this expense as a necessity, treat it the same as your mortgage payment or car loan payment.
Store it somewhere safe
So where do you set aside these monthly installments? You certainly don’t want to be tempted to use this money towards frivolous purchases. Therefore, tracking your savings but keeping the money in your checking account is not a good idea.
Set up a savings account separate from your checking account. Most banks will allow you to have a checking account, a savings account, and one or two other accounts, such as a “Christmas” or “Vacation” share account. Use one of these for the sole purpose of putting away money for an emergency.
In a savings account, you won’t see any huge returns or gains in interest, but the vital characteristic is ease of access. When an emergency arises, you don’t want to have to wait a designated amount of time to withdraw your funds, such as with CDs or bonds. Nor do you want to risk its value by placing it in the stock market. Your money should be safe and accessible, but not too accessible.
After a few months, assess your spending and saving and make any adjustments if necessary. It will take time to curtail your unnecessary spending, just as it will take time to build a robust emergency account. The good news is that you can do it, with the help of budgeting apps, supportive friends and family, and a commitment to saving you can build your safety net. Every contribution is beneficial; each time you choose to save instead of spending is an investment in your future self.
And away we go
This is the beginning of a beautifull friendship. In the meantime, are you curious to know what emotions drive your spending? Take our quiz to find out