Creating a specific savings or emergency fund is a crucial way to safeguard yourself and your family, and is an important first step toward establishing a consistent routine of saving. By setting aside money, even a small sum, for these unforeseen expenses, you can recuperate the lost money more quickly and resume your pursuit of your larger savings objectives.
Why Do I Need it?
An emergency fund refers to a designated cash reserve that is meant to resolve unexpected expenses or a sudden financial crisis. Emergency savings are typically set aside for non-routine bills or payments, irrespective of their size.
Having an emergency fund is crucial because a minor or major financial shock can significantly impact your financial well-being, particularly if it leads to debt. Studies indicate that individuals with insufficient savings are less likely to recover from a financial shock and may rely on credit cards or loans, which could further exacerbate their financial situation.
In some cases, people may be forced to withdraw from other savings, such as retirement funds, to cover such expenses.
How Much is Enough?
The size of your emergency savings fund should be tailored to your specific circumstances. Consider your previous experiences with unexpected expenses and the associated costs. This can guide you in setting a target amount.
Many experts believe an adequate emergency fund should be able to cover a minimum of three months worth of living expenses. If possible, the same experts say a better target should be six to eight months of living expenses.
If you are living on a tight budget or have irregular income, it can be challenging to save money. However, setting aside even a modest amount can offer some financial protection. If you don’t have 3 months emergency savings set aside yet, you’re not alone. Nearly half of the American population does not have 3 months’ worth of expenses set aside.
Some Savings Ideas to Contemplate
There is no perfect scenario for everyone, but we think the following strategies are a good starting point for many people. Read through each one and decide which one suits your current situation the best. Good luck!
A Savings Habit is a Good Place to Start
Keep a Close Eye on Your Cash Flow
Cash flow refers to the movement of money in and out of your account, including when you receive income and when you pay expenses. If your cash flow is not properly managed, you may find yourself short on funds at the end of the month.
By closely monitoring your cash flow, you can identify areas where you can adjust your spending and increase your savings. For example, you can work with your creditors, such as landlords, utility companies, or credit card providers, to shift the due dates of your bills.
You may also be able to allocate a little extra cash to your savings during weeks when you have more available. Making these simple adjustments can help you manage your cash flow and create a more stable financial situation for yourself.
When You Receive a Cash Windfall – Save it!
Throughout the year, there may be occasions where you receive a lump sum of money. A tax refund, for example, could be one of the biggest checks you receive each year. Have the refund deposited directly into a savings account, which will make it easier to set aside the designated amount. Holidays or birthdays also are opportunities when you might receive a cash gift.
Although it may be tempting to splurge, allocating all or a portion of this money toward your savings could be beneficial in building an emergency fund. Sure, it’s not the fun thing to do, but it could make a difference down the road.
Set Your Savings on Automatic
One of the easiest ways to ensure consistent savings is by saving automatically. Achieve this by setting up recurring transfers from your checking account to your savings account through your bank or credit union.
It’s easy to set up and once you determine the amount and frequency of the transfers, you'll be making regular contributions to your savings without the hassle. While you’re setting up your automatic transfers, go the extra mile and set up automatic notifications or calendar reminders so you avoid late fees or overdraft fees.
Make it Work Through your Work
Most employers allow their employees to save automatically. Besides contributing to your retirement fund, some employers may offer the option to split your paycheck between your checking and savings accounts.
If you use direct deposit for your paycheck, it's worth checking with your employer to see if this is an option. This method can help you save money without having to actively think about it, which can be especially useful if you're prone to spending impulsively.
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Where you choose to keep your emergency fund should be determined based on your personal circumstances. It is important to keep the fund secure, easily accessible, and away from temptation so it is only used for non-emergency purposes.
Contact a DR Bank representative today to learn more about how we can help you and your family prepare for a successful financial future.