The 3 simplest steps to build emergency savings
An emergency savings account can wipe away all those feelings of high school inferiority. Who knew Mean Girls was a prelude to life? So, fetch it is not. Here’s how to build your emergency savings in three – 3- simple steps.
Building your emergency savings account
Okay, maybe I’m being, what David calls, “dramatical”. Like “fetch”, that’s not actually a word, but you’d be surprised how often I can use it.
As we’ve learned from personal experience and said many times before, an emergency savings account builds confidence.
1. Do the math
For most of us, our wishes and desires don’t magically appear at our doorstep. Anytime we want to go somewhere, we need a plan to get there. Anytime we want something, we need a strategy to get it. The same goes for an emergency savings account.
Conventional wisdom is to have three to six months’ worth of living expenses in cash or cash equivalents. Even to us, that seems like a lot. If we could save six months’ worth of living expenses, we wouldn’t be so concerned about emergencies.
The truth is, building an emergency savings account isn’t as hard as it seems with the following steps. However, start small and go large. Shoot first to aggressively save $100, then $500 and then $1,000. Once you have $1,000 in emergency savings, then save the difference to achieve your three to six months’ worth of living expenses with a more reasonable level of aggressiveness. If you have a debt to pay off, stop at the $500 to $1,000 emergency savings mark and pay off your debt before you finish your emergency savings plan.
2. Open an inconvenient account
Once you know how much money you must save, then open the most boring savings or brokerage account you can find. Open the Droopy of accounts. Choose an account with no bells or whistles whatsoever. Why?
First, you don’t want to have to pay for anything. This money will be minimally used and your account activity and account balance, at least initially, may not meet the minimum required to avoid fees on many accounts. Second, you don’t want any of the modern conveniences that come with accounts today. You don’t want checking or debit card privileges. You don’t want BillPay or other bill payment features or anything similar. The reason is that this money should be as hard for you to get as Bugs Bunny for Elmer Fudd.
If and when an emergency comes, it must meet the criteria that you have to actually go to the bank or credit union to physically take out your funds. This will help to ensure that you don’t tap this account any time a moment of inconvenience arises, like being stuck with last year’s golf clubs. This isn’t an inconvenience savings account. It’s an emergency savings account.
3. Send it before you spend it
Personally, money burns a hole in our pockets like a hippie to hash. Therefore, we’ve adopted the practice and mantra to send it before we spend it. This means, set up Direct Deposit or electronic funds transfer (EFT) to deposit your calculated regular emergency savings account contribution.
Direct Deposit can be set up through your Human Resource Department at work. EFT can be set up at your bank or credit union. It’s very easy to complete.
Once this contribution is set up to be deposited into your emergency savings account each payday, there’s nothing left for you to do except forget about your emergency savings account. With this forgetful strategy, you’ll save money more quickly than you thought possible.
Once you have an emergency savings account of any size, you’ll have more financial confidence than the entire country of Greece. Follow these three simple steps and you’ll have that confidence with Hermes-like speed (the Greek god, not the boutique clothing store).
Here are more articles on financial preparedness:
- Debt Lasso Method: Best Way to Pay Off Credit Card Debt
- How to Retire? 21 Tips for Financial Planning for Retirement
- 5 Easiest Tips to Make the Best Budget Ever
6 responses to “The 1, 2, 3s of Emergency Savings Plans”
“Oh, please?! Is this another blog about the dire need to build an emergency savings account?” Indeed! The importance of an Emergency Savings Account cannot be overstated … it forms part of the foundation of a sound financial plan and makes other financial endeavors possible.
Ha! You are right James. This was one of the first things we did when getting out of debt. Setting up that account even while we were paying off our debt and getting $1,000 in it helped us then be able to feel comfortable sending out those big checks to pay off our debt. We had the money we needed already in case something happened and we didn’t need to keep the credit cards around! 😉 Thanks for the comment.
I completely agree that you need to automate the emergency fund savings transfers. If you don’t, it only opens you up to having an “emergency” of having to go out for dinner quickly with friends Friday night and never actually setting the money aside!
You are absolutely right Thias. Keeping the money in an account that you can access keeps it in the front of your mind. You look at it as $$ you can spend. That is the wrong way to think about it. We have ours set aside and have the auto deduct from our paychecks so we never see it. Plus then you will not ‘accidentally’ spend it. 🙂
If you use online banking for this inconvenient account, use the online banking tools to label the account. If you login and see “Emergency Savings”, you are less likely to take a little here and there for things you don’t really need. The label reminds you that it’s not just savings, it has a purpose.
Great suggestion. Thanks!