Fewer than 4 in 10 people in the US have enough savings to pay for an unexpected $1,000 expense in cash. That’s a sobering reality in a society where we’re taught that we should have an emergency fund with enough money to cover at least three to six months of expenses.
We get it, though. It's been a tough year for many people. From the natural disasters that have left some without homes, to the economic downturn that has caused so many layoffs, it can be hard to feel secure about your financial future. But there are steps you can take in order to ease your mind and start building an emergency savings fund.
First of all, make sure you're trying not to spend more than what's coming in every month if it’s possible. If it seems like there isn't ever enough money after paying all your bills and obligations, then consider finding ways to earn extra income or ask for a raise from your employer.
While those are very basic suggestions, we understand that everybody’s financial situation and opportunities are different. So, here are a few more helpful ways to quickly build your emergency savings fund in order to help alleviate some financial stress.
Already have your finances in order and want to use your extra savings to start investing? Download the Wealth Stack app today to get started.
Create a Budget
Budgeting can be intimidating, but it doesn't have to be. It's about prioritizing what you spend your money on and limiting the amount of money you spend on unimportant things. Creating a budget is an important first step to getting your finances in order and feeling more in control of them.
To start, it’s important that you set realistic goals and then choose a budgeting style that works for you. One of the most popular and perhaps easiest budgeting methods to follow is the 50-30-20 rule. When following this method, you take your post-tax income and use 50% of it to pay for your necessities, 30% of it for things you want, and put 20% back into savings. In this example, a necessity would be your mortgage or rent payment, a want would be an accessory for your camera you use in your free time, and savings would be putting back $100 straight into your savings account.
However, for the purpose of building an emergency fund, it might be more helpful to simply set a small, achievable goal and put a certain amount of money into a rainy day fund account each month. Whether that’s $50 or $500, it’s simply important that you’re actively starting to save.
Read more about Monthly Budgeting Made Easy. Or, check out our guide to our top Free Online Budgeting Tools.
Track Your Expenses
Do you know where your money is going? The second step to saving more money and boosting your financial security is tracking expenses. And, lucky for you, in today’s day and age, there are tons of free online tools that can easily help you track your expenses.
Mint is easily one of the most well-known budgeting apps. It’s because it provides you with numerous different tools you need to help you manage every area of your finances. And, the platform (both accessible online and via their app) allows you to set spending limits for different categories, and the app will send you an alert when you’ve gone over your budget for the month.
Whatever app you use, or even if you use an expense tracking spreadsheet, the goal here is to learn to look at where your money goes and account for every dollar. Usually, when you start doing that, you’re better able to find areas where you’re overspending or spending unnecessarily. Once you identify those areas, you can start to cut back and put that cash into your emergency savings fund.
Open a High-Yield Savings Account
While there are numerous ways to grow your wealth exponentially in tax-advantaged accounts, that’s not the immediate goal for most people building an emergency savings fund. If you’d like to simply save more money in an accessible account for emergencies, open a high-yield savings account.
These types of accounts typically pay 20 to 25 times the national average of a standard savings account. It’s likely that you’ll be able to open a high-yield savings account with your current bank as most of the main national banks offer high-yield alternatives. It’s worth getting in touch with them to ask about your options.
However, be sure to check the fine print regarding any monthly maintenance fees and minimum account balances.
Set Up Direct Deposit
Once you’ve got that high-yield savings account set up, you’ll want to make sure that you’ve got a direct deposit set up for your regular checking account. This is usually easy to do. If you’re not sure how, here’s a helpful guide on how to set up direct deposit along with helpful links to a few major banks’ direct deposit forms.
By setting up a direct deposit, you’re ensuring that your paycheck goes straight into your account. For starters, a lot of banks will waive monthly maintenance fees if you set up a direct deposit for a certain amount each month. However, it also helps us with the next point...
Transfer 10% of Each Paycheck to Your Emergency Savings
If you can get into the habit of doing so, immediately transfer 10% of every paycheck into the high-yield savings account you opened. If it helps, start viewing your paychecks as 10% less than they actually are and budget accordingly.
This means that if your monthly paycheck is $4,000, plan on putting $400 into savings each month and budget as if your paycheck were really $3,600. Learning how to budget and track your expenses here becomes important as it will help you learn how to funnel money into the right areas and cut back on others so that you can make this work.
Transfer Additional Money into Mutual Funds or Stock Investments for Long-Term Growth
While we are an investment platform, we actually don’t suggest that anybody start investing until they’ve got their financial foundation built. This includes having an emergency fund for yourself or your family and understanding how to optimize your credit score. However, if you’ve taken care of all of that and now have additional money leftover, it’s time to start thinking about how you’ll invest it in yourself and your future!
To learn how to invest as a beginner, download Wealth Stack for free. Once you create an account, you’ll have access to tons of video lessons and tips from professional finance and investment speakers.