Future-Proof Your Finances: Strategies for building emergency funds.

Peace of mind. It is something we all want. If the past few years have taught us anything it’s that circumstances can change quickly, and when they do, it’s good to have a plan. It’s even better to have an emergency fund at your disposal, so you can put that plan into action while you figure out what your next move is. If you’re not prepared for the loss of a job, an unexpected health issue, or a blown car engine, the results can be devastating. That’s why everyone needs to know how to build an emergency fund – and once you do, the peace of mind it brings will inspire you to maintain it.

If you don’t have one, the idea of building an emergency can be daunting. Between inflation and living your life, many of us don’t have a lot of extra money sitting around, and if you do, you’re often saving for things like a vacation, a new car, or the down payment on a house. Those things are fun, important, can bring joy and even peace of mind. However, you should ideally have a separate set of funds set aside for the unexpected.

Nothing brings peace of mind like knowing that whatever happens, you’ll have the money to see it through it. That’s why creating and maintaining an emergency fund is probably the smartest thing you can do for yourself and your loved ones. If you’re just getting started, you need to develop an emergency fund strategy. Here are some tips to get you on your way.

First, there are six steps you need to take. These emergency fund tips should be taken one step at a time.

1. Document and track your expenses. How much money do need every month to live? That includes obvious things like your rent or mortgage payment, transportation costs, food, and utilities. It should also include things you may not be able to give up or get help with such as money for laundry, pet supplies, childcare, or prescriptions.
2. Decide how many months you need to have on hand for an emergency. A common metric is framing it by how long you might need to get by if you suddenly lost your income. If your household depends on a single income, six months is a reasonable time. If you have two or more incomes in your household, figure three to six months. Be conservative – you are planning for an emergency.
3. Track your spending, down to the penny if possible, and understand exactly where and how you spend your income. This is hard (a lot of this is hard) but there are tools and apps to help: check out this list compiled by CNBC).
4. Take a hard look at what you can live without or where you can save some money – at least for a few months. Subscriptions to streaming services, gyms, and media add up – do you need them all? Probably not. What about that daily latte or muffin on the way to work? Mani-pedis? The gardener? What are you buying or spending on that can found for less somewhere else? Get rid of the non-essentials, start packing your lunch, and see if there’s a carpool you can join.
5. Add up all that money and start saving it regularly in an account that is just for emergencies. Fund it with regular transfers – weekly, bi-weekly, or monthly — and be consistent.
6. Put any extra money that comes your way – like tax refunds, bonuses, or salary increases – into that account. All of it.

One variable in this scenario is whether you own or rent your home. For renters, the landlord may take care of things that need to be fixed or replaced, but homeowners are responsible if something breaks unexpectedly. If you live in an older home or in an area where the climate is changing, you may want to include how much you need to have on hand if a furnace goes out or the roof starts leaking.

Once you have your emergency fund built up, don’t use any of it for a vacation or new appliances you don’t need. And if you do need to access funds for an emergency, remember to build the fund back up. It can be tempting to put them into a certificate or buy stocks, but keep your emergency fund accessible – when the times comes, you’ll want to be able to use it without delay.

“But you don’t understand!” (Oh yes, we do!)

Now you may be thinking Wait a minute—I want to enjoy my life! I like getting a mani-pedi! I love ESPN! Of course you do. We all have our luxury items, and those pleasure will be waiting for you on the other side, ready for you to enjoy again once you’ve created your emergency fund. And you’ll be able to enjoy those things even more knowing you are financially secure and prepared for life’s ups and downs.

Start today, now. Start small – work toward a $500 goal, or even better, $1000. A good emergency fund strategy is to save regularly and keep at it. Putting aside $25 per week – the cost of two drinks at a bar these days– will net you $1,300 in a year. $100 a week – a nice meal out for two — will net you $5,200. A $1,000 a month will net you $12,000. Recurring transfers of these amounts will do the work for you and keep you on track.

Here’s a truth we don’t talk enough about: the financial and emotional costs of being unprepared when faced with an emergency are far more devastating than the temporary sacrifices of cutting back for a bit. According to the Fed, many Americans are not prepared. In 2022, 37% of Americans didn’t have enough money available to handle an unexpected $400 expense. That becomes more expensive bill when it goes on a credit card with a 25% interest rate.

Keep in mind you could also build an emergency fund by picking up a side gig or a part-time job You can make money quickly making deliveries a few hours a week with Amazon or driving for Uber or Lyft. People are always looking for help on Craigslist and TaskRabbit, and you can probably make more money than you think selling things you no longer want or use at a garage sale or on E-Bay. The point to remember is that it’s not forever – it’s for the peace of mind, and perhaps, in case of emergency.