If the water heater breaks down, you don’t want to be forced to beg or borrow just to make it through. An emergency fund can be your first line of defense against months or even years of debt. So how do you build one without giving up your ability to live life? In my expert opinion, it all comes down to tricking your brain into making it easy. Try these simple steps and you’ll be on your way to a sizable bank account and feel in control of your cash flow before you know it!
- Open an account at a bank on the other side of town – The first step to building a sizable emergency fund it to have a place to put money that’s out of sight and out of mind. In most cases, a simple checking or savings account will do. Don’t be bothered by the frilly bells and whistles that banks can charge you. You’re not even looking to invest this money. The purpose of this account is easy access in case you need it. Opt for the free version and keep it simple.
- Timing is everything – I strongly suggest a plan that includes emergency fund savings each time you get paid. If you get paid weekly, your emergency account should be funded weekly. If you are paid bi-monthly, you should fund your emergency fund bi-monthly. Since most people are living paycheck to paycheck when starting to set aside reserves, this strategy will help you eliminate the timing challenges that come with savings.
- Any amount will do when starting out – For the first month, I’d suggest just getting started. Don’t stress too much over how much you need to save each pay day. Pick an amount that you can live with and go with it – even if it’s just $25 per paycheck. You’ll most likely find that you won’t miss it and you’ll be able to easily increase the amount you save any time you want. If you want to challenge yourself, that’s fine. Just be careful not to overdo it. It’s better to start small and increase from there than to start big and fail.
- Make it automatic – The most important part of the equation is to establish an automated link from your primary checking account to your new emergency fund account on the other side of town on the same day you get paid (or one day later). Ask your primary bank if they can setup automated transfers to this new account or ask your employer if they can direct deposit an amount there each pay day. If those aren’t options, ask your new emergency fund banker whether they can pull money into this new account from your primary checking account on their end. If that doesn’t work, setup automated bill payments from your primary checking account on the same day that you get paid so that a check will be sent to your new bank on a regular basis. Keep in mind that your plan has a high chance for failure if you are forced to manually transfer money or write a physical check each time your emergency fund needs to be funded. You should opt to set it and forget it.
- Don’t look at your statements – Ok, ok, in good conscience I have to tell you to keep a watchful eye on your new account to be sure you avoid fraud, banking errors or unnecessary fees. But the bottom line is that the less frequently you look at the balance of this account, the more likely you are to let it accumulate without the temptation of touching it. Put a note on the calendar to review it every six months and focus more on reviewing the amount you’re saving each payday than the total account balance. Your goal is to set aside at least 3-6 months worth of money to cover your monthly expenses. And another thing – try not to touch it even if you need it. Look at this account as an account of last resort when things get tough.
My name is Valerie Leonard and I’m not your traditional financial advisor. I want to help you feel in control of your money by using proven strategies that make it easy on you. If you’re looking for a money mentor who can help you reach your goals, hold you accountable, and plan for the unknown, contact me today!