Lisa M. Miller | Posted on Feb 22, 2021
The uncertainty of the past year has taught us that we have to be as prepared as possible for the unexpected. While we're all experiencing this pandemic very differently---some having only minor inconveniences and others finding themselves without a job or having to close their business---those without a savings cushion are vulnerable to feeling the ramifications of COVID-19 for a long time.
You can make saving for emergencies a priority in 2021 by setting goals during America Saves Week---held this year from February 22 to 26. Following are a few reasons why an emergency fund is essential to include in your budget and how to get started.
What is an emergency savings fund?
An emergency savings fund consists of at least $500 that is set aside with a “do not touch unless it’s a real emergency” frame of mind. Saving for this fund starts with small, regularly scheduled automatic contributions that build up over time.
Why should you start saving for emergencies?
Maintaining an emergency savings account may be the most important difference between those who manage to stay afloat and those who sink in debt. It also gives you peace of mind knowing that you can afford to pay unexpected expenses. That’s because saving for emergencies can allow you to easily meet unexpected financial challenges such as repairing the brakes on your car, replacing a broken window in your house, or paying for an unexpected dental procedure.
Not having emergency savings is one of the reasons many individuals borrow too much money, resort to high-cost loans, or increase their credit card balances to high levels.
How should you build your emergency savings?
The easiest and most effective way to save is automatically. Your local bank can help you set up automatic savings by transferring a fixed amount from your checking account to a savings account reserved exclusively as your emergency fund. Another option is to have a portion of your paycheck automatically deposited into your emergency fund savings account through direct deposit. Or, you can commit to making a deposit to this special savings account each time you deposit or cash your paycheck. Opening and keeping your emergency fund in a savings account makes it much less likely that you will use these savings to pay for routine, nonemergency expenses.
How can you get started?
Those with a savings plan are twice as likely to save successfully. This includes setting a goal to build an emergency fund and deciding how much you want to save each month. Begin by making a list of your current expenses and prioritizing those items. There are likely a number of elective items, such as restaurant take-out and entertainment, which are eating into your bigger priority---saving for emergency situations.
Keep in mind that creating an emergency fund is a goal that must be embraced by others living in your household because it requires sacrifice in order to have some peace of mind when emergencies occur.
How much should I save?
The general rule of thumb is that you should keep an equivalent of about six months of living expenses in your emergency fund. Living expenses might include utility bills, monthly rent or mortgage payments, cell phone and data costs, groceries, and more. Take your list of monthly expenses, check it twice, and multiply the total by six. In the case of a significant emergency---such as a loss of a job or other financial hardship---six months of savings would help you ride out the storm.
During America Saves Week, individuals and families make a commitment to themselves to save successfully. Through the support of participating organizations---including many local community banks---together we encourage individuals and families to assess their finances and saving behaviors. The America Saves pledge is the framework that allows savers to set a goal and make an action plan that starts or increases savings to achieve better financial stability in 2021 and beyond.
Make a pledge and create a simple savings plan to help fund emergencies. You can visit americasaves.org for more tips and words of encouragement.