If you’re struggling to make ends meet, an emergency fund can help you achieve more financial freedom. It may seem impossible when money is tight, but these 5 ways to start an emergency fund will help you shift your finances. All of us have dreams. Of course, they differ, but we all want something, whether it is a college education for you or your children, the freedom to travel and pursue passions, or any number of other things. But the idea of being debt-free is certainly appealing. Regardless of whether it is a short-term or long-term goal, financial planning at the simplest level is necessary.
So what’s simple? An emergency fund can help anyone move forward financially regardless of current circumstances. Let’s say you’ve been saving up for something really important to you, and you have a thousand bucks saved. Then, life happens—you have an emergency auto repair. Maybe a series of problems which then decreases your dream stash quickly.
Defining an Emergency Fund
Costly emergencies can deplete your savings quickly, and the dream stash can suddenly become an involuntary emergency fund. Any series of mishaps, repairs or accidents can take away from your financial goals. This is why saved money needs to be specially designated, especially when you’re not making much. After all, our goals and dreams should be our first priority and creating an emergency fund helps ensure that they become a reality.
Short-Term Emergency Fund
Setting aside at least $1,000 for unexpected expenses before paying debt keeps your head above water. This might seem counterintuitive if you’re living pay check to pay check. Because your ultimate goal is to be debt-free so you can afford your passions, the emergency fund breaks the cycle of charging credit cards. It is essential to work toward the emergency fund before paying debts. Otherwise, the emergency costs will go right back onto the cards you’re trying to pay off.
Long-Term Emergency Fund
After the primary emergency fund is created and once your debt is paid off, the rule of thumb is three to six months-worth of living expenses in your emergency fund. This is for those extreme situations like 2020. Now by living expenses, I mean the bare minimum to get by. This is the long-range portion of this plan, but having funds for three to six months can help you survive losing your job before you’re ready to leave.
Defining an Emergency
If you’re not sure if it is an emergency, it probably isn’t one! Emergencies happen unexpectedly, without planning and require immediate attention. If it is something that can be planned like summer vacation, an anniversary dinner or Christmas shopping, it’s not an emergency. But if these types of expenditures chip into your emergency fund or get charged on your revolving credit card debit, it makes it difficult to save. So, if you don’t want to keep squeezing by until the next paycheck, cut what is unnecessary and build the emergency fund.
Five Ways to Start an Emergency Fund
Limit Entertainment and Dinners
One of the easiest ways to start your fund is to shift your entertainment budget to savings. I’m always shocked when I add up my dinner receipts. And I have found that meal planning really helps because we tend to order dinner when we are pinched for time. However, when we have an amazing meal planned, we don’t venture out. This saves a lot of money every month.
On another note, even if you don’t eat out often, it is a good idea to meal plan before grocery shopping. Otherwise, items tend to jump in the cart! It’s amazing how quick these funds add up in savings.
Create Overtime Opportunity
Working your normal schedule will produce your normal pay. And if you are paid a salary, working overtime just produces more work. One way to gain more income is working extra hours. If paid by the hour, working an extra shift or holidays might be a good approach. When I was in this position, I pursued work outside of my paycheck job. This provided the extra money I needed and eventually evolved into full-time work and time-freedom.
Track Your Spending
Recording your spending on a visual document like a chart or graph can produce a huge realization! That’s when I started noticing that the $30 dinners were depleting the budget by $400 a month. You can use a simple spreadsheet program and make your own charts or one of the many accounting programs. What really matters is that you track where your dollars are going. When all those little coffee trips and dinners add up, they are a big money waster. Tracking the money identifies the expenditures. It’s just a matter of deciding: Cut the spending and save.
Separate Your Check
Once you’ve decided on your budget, move the designated savings out of your checking account. Having a savings account for emergencies, and others for goals like college or real estate investments keeps each goal individualized and monitored. When you decide to live on a percentage of your income, the savings can also be set as an auto-withdrawal, so it remains out of sight and out of mind.
Beware of Immediate Gratification
Let’s face it! We live in an immediate gratification world. It’s so easy to get a new car. Or go on a shopping spree! And after saving for a bit, it’s really easy to decide ‘I deserve it!’ Although that’s true, it is also important to remember that you deserve your goals and dreams. You deserve the better life that you want. So, when immediate gratification raises its ugly head, visualize your master plan and your debt-free life.
And, of course, keep that emergency replenished and plump. Having the unexpected stuff covered builds protection for your dreams. When it comes to finances, keep yourself aware and conscious of the bigger picture and not just this moment.
