The recent pandemic has increased people’s awareness of the importance of having an emergency fund (also called a rainy-day fund). Although it can be hard to build an emergency fund with limited income, it is certainly achievable with the right course of action. Let’s look at some ideas to saving for your emergency fund.
- Summarize your expenses and rank them. If you haven’t recently done so, take the time to rate expenses by Needs vs Wants. Wants are less important than Needs. Prioritize the Wants and rank them 1-3 for high, medium and low. Look closely at this list and it should provide you with some areas to trim spending for things that are not important to you.
- Extra payday. Many employees are paid every two weeks. This provides a total of 26 paychecks per year instead of 24. One way to look at this is that you have two extra paychecks. Think of earmarking some (or all) of the extra paychecks for your rainy-day fund.
- Give yourself a refund or gift. Try using unexpected tax refunds, health reimbursements or other unexpected income towards your savings goals.
- Make it automatic. Start with a low dollar amount and have a monthly transfer to a savings account (used for your emergency fund). Increase the amount periodically.
- Do not spend the raise. If you are fortunate to receive a pay raise, allocate it to your savings.
- Cancel home services. With many spending extra time at home, it may be a great time to consider mowing your own lawn, dropping house cleaning, or other services you hire out.
- Review the amount you are investing in your retirement plan through work. If you are contributing over the company match, consider reducing your contribution and putting that cash instead into the emergency fund. Once you have met your goal, consider switching back to putting those funds into your retirement account. At Johnson Bixby, we’re more than happy to discuss a plan to help you achieve this.
- Credit card points. If you have credit card points, consider cashing in your rewards and put it into your savings. (Also, in most instances do not carry a credit card balance, or those cash rewards are not worth it.)
- Reduce dining out. Out of necessity, many have found themselves cooking more at home. Consider keeping it up – it can be fun and much easier to cook at home. Plus, it can help you save money.
- Spending less now? Keep it up. The coronavirus has changed our daily habits and shifted priorities. Many people are finding that they are not spending as much, and they are just as happy. If you are lucky to be in this camp, use this spending reduction to boost your savings.
With any plan, it’s important to set goals that are realistic and achievable. Set a dollar amount with a timeframe that you feel that you can achieve. Make sure to set the bar high enough so you must work to reach it, but don’t make it a mountain that’s impossible to climb. Also, do not get discouraged if you have setbacks. Be consistent and follow your plan. When you have success, reward yourself but keep up the good work. A solid rainy day fund is an important part of everyday life and good savings go a long way to making life easier, safer, and more secure. Don’t hesitate to reach out if you have questions about your situation.