Saving for emergencies means being prepared for the unexpected. It’s avoiding stress because you know you can handle surprises when they happen.
In 2019, about 61% of millennials had less than $500 stashed away to deal with emergenciesDisclosure 1 meaning many may have been unprepared for a financial surprise like loss of income or a hospital stay. But we all had a lesson in dealing with the unexpected in 2020, living through a pandemic. Looking to how we can grow from 2020, we have a fresh perspective on what’s important for our financial and personal well-being. And if we consistently put away some of our earnings and reallocate some of our nonessential spending, little by little, we can grow our savings—which can impact our happiness.
An emergency fund means financial confidence
Brian Ford, head of Financial Wellness at Truist, calls an emergency fund your “financial confidence account” because of the peace of mind it can bring in life. He’s definitely onto something—a Truist National Financial Confidence Poll found that 84% of people who took action to improve their financial situation, like budgeting seriously and saving more, felt a positive impact on their life and, in turn, were happier.Disclosure 2
Your emergency fund should be kept in a separate, no-touch account that’s set aside specifically for unexpected situations, like a temporary loss of income. It’s not for big splurges or expenses you know will come up every year, like taxes or vehicle maintenance. This account should be liquid—meaning you can quickly and easily access the funds if you need them during a difficult time. A high-yield savings account to complement your personal checking account is a perfect example of a good place to stash your emergency fund.
Start small, and work your way up
The first step in creating an emergency fund is knowing how much to save. Starting with a goal of saving $1,000 is a great way to get your emergency fund going. Give yourself a realistic target date for reaching this goal—but don’t be hard on yourself if you don’t reach it as quickly as you’d like. Simply having a goal will help keep you motivated, and reaching that first milestone will give you a confidence boost.
Once you’ve saved $1,000, aim to continue growing your emergency fund steadily until it’s enough to cover several months’ worth of living expenses.
Not sure how much that is? As a rough baseline, Ford says families typically need about 80% of their post-tax income to cover their living expenses. Without taking taxes and other withholdings into account, this chart from Ford shows how much you might want to save in order to cover three months of living.
To make sure your financial confidence account fits your unique situation, however, you should track your necessary expenses (and exclude unnecessary ones) for a few months—this should give you a good idea of how much you really want to have saved.
Strong saving habits you can start today
Save automatically: Automatic deductions or transfers are a powerful way to help you save because they make it easy to “pay yourself first”—yet only 20% of Americans use them.Disclosure 2 Setting your savings on autopilot can help you reach your savings goals because you don’t even have to think about moving your money from one account to the other, which also removes some of the temptation to spend that money you could be saving. (If you’re an impulse spender, this “out of sight, out of mind” approach can be extremely helpful.)
“All great savers save first and make it automatic,” Ford says. “You will adjust to spending less, and after a couple of months, you may not even notice the money that’s being transferred. When that’s the case, consider increasing the amount.”
To set up automatic transfers to your savings account, ask your bank or employer to automatically transfer money from your paychecks—it usually just requires filling out a simple form.
Commit to an amount and check in regularly: If you’re just starting your journey to financial confidence, know that it’s not how much you have put away right now that matters—it’s that you’re saving on a regular basis. This amount could be $20 a week or $250 per month, but consider committing to a number. Then, make a reminder to check in on your savings account every few months to see how it’s growing.
Spend wisely: As saving becomes a habit, be sure to track your expenses and look for ways to reduce where you can. Think of your long-term goals in life, and work on a budget that’s aligned with your priorities and what you value most. Values-based budgeting can be a powerful way to get more joy from your financial habits. By curbing spending on unnecessary expenses, you’re able to contribute more toward your future and overall financial confidence.
Saving sets the foundation for your future
Knowing how much to save and having a safety net for whatever happens in life can bring you peace of mind and a comforting sense of security. Even if you have other financial goals, such as paying off debt, saving for emergencies should be prioritized.
“The nonmonetary benefits of an emergency fund are real and tangible,” Ford says. “When you have a fully funded financial confidence account, a tremendous amount of peace and confidence will flow into your life and relationships.”
This financial confidence account can be your foundation because it allows you to respond to challenges with a clear mind—so start saving or review your savings strategy this week.