Building a Short-Term Emergency Fund
All the best financial experts agree you need to keep an emergency fund. Keeping three to five months of living expenses in a savings account, certificate account or investment account can be the difference between a temporary hardship and a debt trap. Using that money instead of credit cards or short-term loans is a lot less expensive in the long run.
There are several reasons why you may need to use that money. It could be from an unexpected expense, like a medical bill or a car repair. It could also be a job loss that forces you to tap out your savings. Whatever the cause, it’s better to pay for it out of savings than have to use credit or borrow from family or friends.
A crisis right now, even a minor one, can cause financial problems that will create a ripple effect if you don’t have an emergency fund. You could find yourself in a much worse position in three months’ time. Getting to a position of financial security should be your highest banking priority. That means building your emergency fund as quickly as possible.
These three steps will help you plan ahead and start your emergency fund.
Make an emergency budget – and stick to it!
Without an emergency fund, you could be a blown tire, missed shift or broken arm away from a financial catastrophe. That’s why an emergency fund is so important. You’ll want to save enough to survive for a few months in the event you have no regular income. Cut spending wherever you can. Temporarily cutting back on media, clothes and other discretionary spending is a great idea.
Also consider consolidating your savings. If you’ve been saving for a vacation, a new car or some other big-ticket item, stop putting money into those “buckets” until you build a few months of living expenses. Once you have a decent cushion, you can get back to saving for other priorities. If these cuts aren’t enough, finding money in more extreme places might be helpful, like selling a car and using public transportation.
If you’re still stuck on saving, add up only what you absolutely need to live and subtract that from your income to get an idea of what you could be saving. Remember, a budget is only as good as your commitment to it, but make sure your budget is realistic!
Build income wherever you can
There’s no secret about building your savings. You can only save the difference between your income and your expenses. In your budget, you worked on minimizing expenses. Now, it’s time to turn your attention to the income side.
Raising your income at work could be as easy as asking for a raise. It could also mean taking additional hours or picking up extra shifts from co-workers. You don’t have to do so for the rest of your career, just for a few months until you see some real savings.
You may also need to boost your income outside of work. Selling some items you no longer use could be a way to make some quick cash. Picking up freelance or contract work can also be a way to earn extra money. If you own a car, consider driving for Uber or Lyft in your spare time. It will create a stressful few months, but will be worth it to have a secure fund. You might also make connections that could help your career over the long term.
Build a backup plan
Think about what you’d do now if you lost your job, even without your emergency fund. Make a list of phone calls you can make to find temporary work. Who in your network do you know who could use your skills on a temporary or contract basis? Do you know anyone who, if you absolutely had to, you could call for a quick loan?
There are a few other questions to ask. What stuff sitting around your house would you sell if you had to? What does your food budget look like with $50 taken out of it? It’s easier to make these decisions when you’ve got the time and space to reflect on them. Making these choices with a past due notice in hand is much harder.
Hopefully, you’ll never have to use these ideas, but you’ll feel better for having thought about them beforehand. It’s also something proactive you can do instead of worrying. That alone is worth the effort.
*The content provided in this article consists of the opinions and ideas of the Frenchtown Financial Opportunity Center, does not constitute legal or financial advice, and should be used for informational purposes only. Any decisions you make based on the information contained in this article is made in your sole discretion and liability. The Frenchtown Financial Opportunity Center disclaims any damages or liability for decisions you make based on the information provided.