Top 6 Emergency Fund Tips for 2021
- Author: Jessica Williams
- Posted: 2024-10-15
The Covid-19 pandemic has changed many people's lives throughout the country. As it seems, the pandemic hit some people harder because they were unprepared- financially.
Today, nearly everyone knows that it is important to have an emergency fund. However, very few people actually know how to build one.
How do you start saving when you have a debt to pay off? Is it possible to do it with a meagre salary and so many expenses?
If you want to build a sustainable emergency fund in 2021, there are a few things you need to keep in mind.
Begin Slowly
Any financial management expert will tell you to set a number and use it as a benchmark. It can be between 6 and 12 months of your expenses. While that's great, I know that saving for at least six months' worth of expenses can feel intimidating. It's the reason some people don't even start in the first place.
In 2021, you can do things differently by starting with small goals and working up to your objective.
For instance, you can start with a $400 target, then raise it to $900, then $1800 and so on. That would be more manageable and comfortable, particularly if you are already bombarded with other financial commitments.
Select an Ideal Place to Stash the Money
You have many great options, but the one you choose should reflect your specific situation. Are you just starting to build the fund? If so, then you may want to go with a high interest savings account. When your cushion is complete, you can go ahead and target higher rates with low risk and high liquidity vehicles, such as certificates of Deposit.
It's also important to select a good bank to get a good deal. For instance, Ally Bank and Chime Banks are ideal because they offer long-term certificates of deposit with low early withdrawal penalties. They also have many great features, such as spending and savings accounts, debit card and early paycheck access.
Just remember to keep your emergency funds account and your regular savings account separate, if you cannot use different banks. This will lower or eliminate the temptation of drawing from them before a real emergency.
Automate your Contributions
As you may already know, dollars always move and disappear faster than we expect. The best way to keep them from escaping is by paying yourself first. Create automatic deposit to move your cash from your paycheck to your emergency funds account. A simple way to do this is to establish a certain percentage of your monthly pay and send it directly into your savings account each month. If you have to, you can set up a separate direct deposit with your employer to make things easier.
Don't Wait to Clear Your Debt to Start Saving
Many people usually plan to start saving right after they've paid off their debts. Unfortunately, that's a huge mistake that you cannot afford to make in 2021. Each time you put off saving, you miss out on a very important component of saving known as time.
Over time, money has the capacity to gain interest on previous interest. That concept is referred to as compounding. That means that if you choose to pay off your debts instead of investing in 401(k), there's a chance you'd miss out on the corresponding employer contributions.
Trim Your Monthly Expenses
You can reach your saving goals faster by reviewing your expenses and trimming all the non-essential expenses. That simple move can even increase your monthly allocation. The most important thing you need to keep in mind here is that going cold turkey may work against you.
Simply prioritize your monthly expenses. For instance, if you find that you're going out every week, you can reduce that to two outings per month. Similarly, you can stop subscriptions for services you don't use, such as movies, curb your non-discretionary shopping and so on.
Reallocate Your Receivables
If you've just received a tax refund, a bonus at work or a small envelope on your birthday, you can set aside a certain portion of it to allocate to your emergency fund. When you receive a pay rise or something similar, prioritize saving.
It's safe to say that 2020 taught us many things regarding our personal finances, and one of them is the importance of having an emergency fund. 2021 can be your fresh start to effectively set up your own emergency fund and have some peace of mind. Usually, it's not an easy process; however, with these proven tips, your journey can be stress-free and successful.
