Yahoo Finance 4 Steps for Building an Emergency Fund From Scratch
Saving money for a big purchase or an investment is a common goal held by most people. What’s less common is to save for a rainy day — a really bad, no good, wipe it all out kind of event. Keeping an emergency fund on hand is starting to become more and more necessary for working Americans, especially as natural disasters and devastating events seem to be on the rise.
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Alejandra Rojas of The Money Mindset Hub said that “…building an emergency fund is one of the most important things I highlight in all of my financial growth programs. Interestingly enough, it is also one of the things people often overlook, as the reasons for building one may seem vague.”
If you are reading this and thinking, “Uh oh, I don’t have an emergency fund and do not know where to start,” rest assured that GOBankingRates has you covered. Some financial planners have shared their stories and educational lessons for how to build an emergency fund from scratch (and how you can too!).
Start With Your Mindset
“Before looking at the numbers I think you need to tackle mindset,” said Gloria Garcia Cisneros, a wealth manager with a CFP license at LourdMurray.
“I believe people don’t realize how humans tend to self-sabotage with money without knowing it,” Cisneros continued. “Psychologically bucketing and automation help out habits because they will reduce our active involvement. If we have to manually go in and do something it is less likely to happen.
“For example, if we see cash in our checking we are likely to feel like we can spend it. The act of setting up an account structure and a system that feeds in cash to the different accounts automatically eliminates the behavior issue most of us have that is preventing us from consistently putting money away for our future selves,” Cisneros described. “Exercises I’ve done with clients before include a review of not only the investments and savings, but review of possible account consolidations or creating an account structure that works for them.
“Then we go through and set up direct deposit into the checking, savings, and investment accounts based on a spending plan that works for them,” Cisneros recalled. “I remind them savings/investing shouldn’t be hard, it should be easy, boring, and efficient!”
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Examine the Full Picture
Once you’ve tackled the psychology and implemented a successful account structure, Cisneros believes it is the perfect time to look at the full financial picture.
Rojas suggested that you start with your cost of living.
“Track your expenses and identify which ones are your needs, which ones are your wants that have become key to your lifestyle, and which ones are your wants that you can live without.
“Once you have those identified, see the monthly total of your needs — this would be your minimum fund — and your wants that have become key — this would be the ideal fund — and multiply it by six,” Rojas broke it down. “This number is not set in stone; five to six months is just my community’s average time to pivot between financial situations, so six months is a good benchmark”
“You will want to be clear about the goals and have those drive the behavior and the why behind all the work we do you see great results,” Cisneros said.
“A general rule of thumb for an emergency fund that is adequate is 3-6 months of expenses. If there is less job security, one income earning, and kids you may want to lean toward the 6 months,” Cisneros added.
“Alternatively, if you are single and have a stable job you may be fine with 3 months. You also want to take into account the risk tolerance of an individual,” Cisneros said.
“Once you have your number I would review your income and expenses and see if there is naturally an amount you could put away every month and send that to your high-yield savings,” Cisneros described. “If cash flow is tight, I would review your expenses with a mindful lens and see if there are expenses you don’t need or could do without to build that buffer.”
Be Consistent With Contributions
“However, if you are just starting off on this journey, these numbers might be staggering and the last thing you want is to feel unmotivated,” Cisneros said. “So I would say shoot for your first $1,000.
“Starting small and putting away $50 dollars a paycheck can get you there in less than a year (assuming you are paid twice a month),” Cisneros added. “And once you get there make the next $1,000 and then $5,000 your next goal and so on. This will help you gain momentum without a large number looming over your head. Also, for perspective, just know that 4 in 10 Americans can’t cover a $1,000 expense, so you are not alone and the goal is just to start saving consistently!”
“Set automatic percentages to contribute to your emergency fund,” Rojas offered. “Depending on your bandwidth, you may want to set aside 10%-20% of your monthly income, or any income you have to build up this fund.”
“Remember to leverage automation and the hardest part is saving that first drop in the bucket,” Cisneros said. “You will be glad you did when an unexpected life expense happens.”
Go For High Yield
Rojas shared a pro tip to grow your emergency money faster: “[b]uild this fund in a high-yield savings account (HYSA) instead of a normal savings account. Once you reach your target amount and need to take money out, replace it quickly. It’s always better to replenish a bit than to start from scratch.”
Rojas pointed out that this process, which typically takes about a year, in supporting people during the building of an emergency fund “…is very simple and can be tweaked depending on whether they are coming out of a financial trauma state (Painting the reasons behind an emergency fund takes priority) or currently navigating through it (Painting the vision of a life beyond of the financial situation and how this fund supports it is key).”
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This article originally appeared on GOBankingRates.com: 4 Steps for Building an Emergency Fund From Scratch
