Growing up, we were taught what to do in times of emergency, much like the steps to take if you catch on fire. However, as you get older and the number of things that could go wrong increases, it's important to be prepared.
Major emergencies happen every day. According to a 2014 study by the National Highway Traffic Safety Administration, there are 10-billion car accidents a year leading to combined loss of $871 billion. From having good car insurance to using a home security system, there are many ways we can protect ourselves and be prepared in case of an emergency. On top of these safety measures, it's important to prepare financially because these costly surprises can be major hits to your bank account.
Building an emergency fund can mean the difference between a bump in the road and a significant spiral into debt, or even bankruptcy. Now, how can you get started on building one?
Step 1: Build/Stick to a Budget and Set a Target Savings Goal
According a survey from the United States Department of Labor Consumer Expenditure, people spend half of their food budgets on eating out. Setting up a budget is the first step to figure out how much you not only need, but can save. It's crucial to stick to your budget and reduce unnecessary spending.
To start your emergency fund, set your target in order to have enough money to completely cover your living expenses over the course of a few months (your required payments in your budget like food, housing, student loans, etc). This will give you an idea of how much you should have in your fund, but it's important to apply it to your life and what you can afford to save.
Step 2: Take a Look at Your Debt
The thought of saving alongside paying off the debt you've incurred can be a scary thing. However, these required payments, especially your student loans, can be changed and reduced. It's important to do what you can to make sure you put yourself in the best position possible to not only reduce your debt but to do so in a timely manner. It could be paying off your highest rate loans more aggressively, consolidating into one monthly payment, or refinancing to a lower rate. If you refinance your student loans, companies like Earnest give you the ability to customize your monthly payment to fit your budget.
Step 3: Automatic Withdrawals
After you set up your budget and figure out the amount you can to put into your emergency fund, it can be hard to see the money available and manually put it into savings. The easiest way to make sure you set the money aside is automatically transferring it out of your paycheck. You should be able to use your company's payment system to separate your paycheck into different accounts. If that's not available, you can set up automatic withdrawals from your checking to your savings account. This way you reduce the urge to use your savings for anything, but an emergency.
Step 4: Save with a Side Hustle
If you're struggling financially to build your fund based on the lack of money you have available to set aside, think about any “side hustles” or projects you can do to make some extra money. From driving for Uber, to starting a blog, there are an extensive number of side hustles you can pick up to earn some extra cash to add to your fund.