“Hope for the best, plan for the worst.”
It’s not exactly the most optimistic credo you could adopt. But living by these eight words is one of the surest ways to make it over life’s numerous hurdles unscathed.
And today, we’re going to talk about the financial action that’s core to this philosophy: Building an emergency fund.
The Tea: One of the fun¹ things about growing up is discovering the myriad ways the universe can reach into your wallet. Around just about every corner is the icy pickpocket of calamity and circumstance, and if you’re not prepared, life can shift from planning for wants to scraping for needs in a flash.
Consider a few of life’s common financial body blows:
- Roof replacement: $8,000-$24,000
- New HVAC: $6,000-$12,000
- Car suspension replacement: $2,500-$3,500
- Broken arm treatment: $3,000-$16,000
- Pet veterinarian hospitalization: $600-$3,500
These and numerous other high-priced emergencies often pop up out of nowhere, leaving people with two choices: pay now, or pay over time. Neither of those options are exactly a treat.
If you’re able to pay up front, though, you can at least contain the damage and move on.
If you’re not? You have to pay over time, whether that’s putting the expense on a credit card or getting a loan to finance the deal. And doing so saddles you with interest, ballooning the cost even further.
Enter the emergency fund.
An emergency fund is a stash of cash set aside to shield you from life’s little whammies. It ensures that, when you’re hit with a sudden bill, you can knock it out immediately rather than letting it linger with interest.
We frequently suggest building an emergency fund. No, really. We talk about it a lot.
But many people simply don’t (or can’t) cobble one together. Consider these findings from a new study from Empower:
- Americans’ median emergency savings sit at $600
- 37% of Americans say they can’t afford an emergency expense over $400
- 21% say they have no emergency savings
- 62% say a dedicated emergency fund is a priority, but …
- 57% say they’ve held back on contributing because of high inflation and price increases
It’s all illustrative of a financial handicap that, unfortunately, could lead to even further setbacks down the road.
So if you don’t yet have an emergency fund (or you have one but want to grow it more effectively), read on as we discuss some basic building blocks.
The Take: This week, we talked with Mark Malek, CIO at brokerage and financial advisory service provider Siebert, about how to start putting together an emergency fund. It’s a simple set of tips that anyone can customize to match their specific financial means:
- Set an attainable goal: Malek says your end goal should be an emergency fund that can cover three to six months’ worth of living expenses. But if you try to eat the whole elephant all at once, you’ll likely only get discouraged. “Start with a realistic goal and increase your savings over time,” he says.
- Examine your budget: Look at your income and expenses from the past 12 months. If you already have room to save toward an emergency fund, write that into your budget. If you don’t, you’ll want to look at where you can cut back to free up cash. In some cases, you can do this without even cutting back—Malek mentions tactics such as picking up takeout rather than paying high delivery fees, or making sure you’re taking advantage of internet and streaming incentive programs or promotions. If you still need room, you might need to look at cutting back on some discretionary expenditures, like going to the movies or eating out.
- Out of sight, out of mind: Once you know how much you can allocate to your savings, automate it. Set a regular, automatic transfer to move a fixed amount from each paycheck to your savings (say, $50 each pay period).
- Treat emergency savings as immovable: As long as it is financially feasible, address emergency savings like you would utilities and rent. “Not saving is simply not an option,” Malek says.
- Get a side hustle: While you can cut your way to freeing up cash for savings, you might also be able to make more money. Side hustles can generate extra income dedicated solely to your emergency fund.
- Don’t spend more when you get more: Did you receive a bonus at work? Did a relative pass away and leave you an inheritance of a few thousand dollars? Allocate any financial windfalls to your emergency fund until you’ve hit your savings goal.
- Reassess regularly: A good budgeting rule of thumb is not to “set it and forget it.” You should regularly review your savings plan to see if you can save more, and to incorporate changes like raises or new bills. As you do, adjust your plan accordingly.
- Invest wisely: “Let your savings work for you by seeking out safe investments with higher yields,” Malek says. Because an emergency fund needs to be at least somewhat liquid (you should be able to access that cash quickly), we tend to recommend products like high-yield savings accounts (HYSAs), money market accounts, and certificates of deposit (CDs).
Want to see what this looks like in action? Malek even provides a sample scenario:
- Sarah is a full-time nurse earning $75,000 a year. She sets a goal to save $9,000, which covers three months’ worth of living expenses.
- Sarah cuts her dining-out expenses to $50 per month, from $200 per month previously. She also saves $180 per month by switching to a cheaper internet plan.
- Sarah ultimately decides she can contribute $600 per month to savings. She is paid twice per month. She sets up an automatic transfer of $300 from each paycheck to her savings account.
- Sarah treats her $600 monthly savings contribution as a non-negotiable bill.
- Sarah picks up a side hustle as a freelance medical writer. She earns an extra $500 per month, and she allocates all of that money to her emergency fund.
- Sarah gets a $1,000 bonus at work. She immediately transfers it from her checking account into her emergency fund.
- Sarah receives a raise. She looks at her budget and decides to improve her monthly savings contribution, from $600 to $700.
- Sarah opens a high-yield savings account. She now earns 4.5% instead of 0.5%, getting far better returns while still keeping her funds liquid.
The end goal? Within 12 months, Sarah successfully saves $9,000, providing her with a financial safety net and peace of mind.
“If we’ve learned anything in the past few years, it’s that having a financial safety net is crucial for unexpected occurrences like medical emergencies, car repairs, sudden unemployment, or even inflation,” Malek says. “Start saving right away, even if it’s just a small amount each month. Something is better than nothing, and saving becomes easier with practice.”
It’s easy to read that, but it’s another thing to believe it. You might think only socking away a few bucks every month won’t matter, but consider this: Even if you can only afford to put away $50 each month, you’ll still end up saving $600 within a year—an amount that puts you level with Americans’ median emergency savings, and is enough to cover or at least partially blunt several financial emergencies.
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Thanks for taking the time to sit down and read what we had to say this week. Have a great weekend, and remember: We made it to a football season. Football will be on every week until February 2025.
¹ Kyle, a homeowner of just two years, has so far eaten five expenses of $4,000 or more since moving in. Decidedly not fun.
Riley & Kyle
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