An Emergency Fund Acts as a Financial Buffer
We all have unexpected life events arise. Maybe the transmission on that old car finally kicked out, and it’s time for you to get it fixed or buy a new car altogether. Maybe your refrigerator broke down, your roof started leaking, or you had an unforeseen trip to the hospital. An emergency fund is your buffer against these types of financial shocks. Having an allotted amount of money set aside for emergencies can prevent you from spiraling into debt by overusing credit cards, taking out loans, or paying high taxes on retirement fund withdrawals.
For Young Professionals just starting out, building an emergency fund might seem like an impossible hurdle. However, it might be simpler than you think. Here are five easy steps you can take…
1) Know your budget
The first step to building an emergency fund is to make sure you have a sturdy budget as your starting point. It will become increasingly difficult to save if you’re unsure of what you’re spending money on. When you don’t track how much you’re spending and where, you run the risk of being out of money after paying bills and other expenses or worse yet, being in a deficit. Click here for more information on how to build a budget.
2) Set a measurable goal
Another key aspect of building an emergency fund is setting measurable goals. This means having a clear and achievable plan for setting aside money on a regular basis. For example, if your goal is to save $1,000 in 9 months, divide that number by 9, and ensure that this amount is feasible. If it is, remember to be disciplined about putting that amount in your savings, whether you split the amount up between paychecks or transfer it automatically to your savings once a month.
3) Save 3-6 months of expenses
A good rule of thumb is to save for 3-6 months of expenses such as rent, groceries, gas, and other bills (basically, everything that you budget for monthly). In a post-pandemic world, we all know that our jobs, health, and daily lifestyles can drastically change in an instant. Having an emergency fund as a financial cushion can prevent panic and give you time to figure out your next steps.
4) Keep your savings account separate from your checking
Keeping your savings separate from your checking account will urge you to think twice about dipping into your savings out of convenience. Additionally, you have multiple options for savings accounts. You can choose a traditional savings account where there are little to no transaction fees or interest. Another option is a high-yield savings account or money market, which has a higher interest rate with immediate cash access but can allow you to grow money faster.
5) Celebrate when you succeed
You’ve worked hard! The whole point is, after all, to save money for the life you want to live. After you’ve reached your first milestone goal, find a way to treat yourself and then set a new goal going forward.
Even though building an emergency fund can be difficult in the short term, it is well worth it in the long term. An emergency fund is a safety net that provides peace of mind during stressful and costly situations. So, just remember, you can build your fund step-by-step and steadily work toward achieving your goals.
Not sure where to start with building your savings? Or just need some assistance with budgeting? Click here to contact us now and schedule a consultation. Or click here to learn more about our Financial Planning and Investment services.
Learn more by reviewing these helpful Young Professional resources
We’ve created blogs, educational videos, and other resources designed specifically with you in mind. These resources include topics on how to invest, establish credit, decipher a retirement plan, and more. Click here to access all of our Young Professional resources.
Blog by Kathryn Miller, CPA – Senior Tax Accountant
Learn more about Kathryn and the rest of the Storen Financial team here.