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Americans are getting the message. The personal savings rate for Americans in 2009 was the highest it has been in 16 years. We’ve learned we can’t depend on the banks or the government for funds; we have to depend on ourselves. Saving for retirement or a big purchase is great, but it all starts with having an emergency savings fund.
Continuing our Financial Resolutions this week, here’s why it is crucial to have an emergency savings fund and how to get started saving.
Why it is so important
Avoid Debt – Many people see credit cards as the answer to emergencies that arise. They charge unexpected expenses like car and home repair on credit cards. Then they are left worrying how to pay the bill. But if you have a rainy day fund, you don’t have to worry about it. Paying with savings keeps you from going into debt and accruing interest and fees on top of all the money you owe.
Gain peace of mind – Avoiding debt is a great practical reason to have an emergency fund. But even more important, is the psychological reason. Having a financial safety cushion gives you peace of mind and lets you sleep at night without financial worry. It also allows you the opportunity to make better decisions without feeling you are in a pressure cooker. If an unexpected home repair arises, you can fix it right instead of just patching it. Or if you lose your job, you can afford to wait for the right job instead of just taking any job.
How to get started
Start the habit – Having an emergency fund is about creating a saving habit. The first step is to setup a separate account and then start funding it. Don’t worry about how much. Literally start with just $10 a week. Even that small amount leads to $500 a year. Imagine if you tripled that or more.
Make it automated – Nearly every bank or credit union now offers online banking. You can simply set up an automatic transfer every week or every pay period from your checking account to your rainy day fund. This takes all the hassle out of saving.
Look for more savings – Once you have started the habit and made it automatic, start looking for ways to save more. What can you change in your budget to leave you with more savings? If you don’t watch all the cable channels you have, can you change your plan and save an extra $20 a month? How about earning more money? Can you sell items you no longer need? Or offer to babysit for extra cash? Don’t focus on the amount, focus on the quantity. Twenty dollars a month is no big deal, but in a year its $240.
Reach for a goal – You have set the gears in motion and now you can start working towards a goal. You can start small with $1000. Once you reach that, aim for one month’s expenses. Your next goal should be three month’s expenses, and your ultimate rainy day fund goal should be six to nine months of expenses. If you are a family with one wage earner, it is even more important to have a large emergency fund.
Once you get your emergency fund all set, you can start working on long term saving like retirement and your kid’s college education. Join us again next Monday to learn how to retire with more funds than grey hair.
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