You know the drill with emergency funds. You’re supposed to save between three to six months of living expenses in this savings account. That should cover you if you lose your job, need to care for an ill loved one, or face several unexpected expenses.
On paper, that three-month minimum sounds like a practical way to insulate your finances against the unknown. In reality, it may seem like an impossible goal to achieve in this economy.
If you believe you can’t make this three-month goal, here are some tips that can help you feel more secure right now.
Know Your Backup
People live without savings all the time — whether they drained their savings on an emergency or just started squirrelling away some money for a rainy day. These people rely on other safety nets (like a line of credit) until they can build up their savings.
You can get a line of credit to serve as your personal safety net while you focus on your savings. You can feel secure knowing you have funds to fall back on if you need to make an urgent, unexpected expense before reaching your goal.
You can visit Fora to learn more about how an emergency line of credit can help if you’re approved. This is a revolving personal loan, you can draw against your maximum limit any time you have room on your account.
Set Your Sights on Something More Manageable
Three months of living expenses could be nearly $10K for someone earning $40K a year. That much money can be daunting for anyone.
If you feel overwhelmed with this tremendous goal, stop thinking of your emergency fund in this way. Instead, focus on something that’s a little less daunting, like your first $1K. That’s according to radio personality and personal finance advisor Dave Ramsey. He tells his fans to focus on how they can save their first $1,000 instead.
While Ramsey admits $1K won’t cover every emergency, it’s a great start. At this size, it’s easier to break down your goal into actionable steps — you can save this in a year with a little less than $83 per month. With a $200 monthly contribution, you would have this in five months.
Ramsey says this lower amount allows you to multitask saving while paying down debt. Once you clear these accounts, you can start saving a lot more.
Open a High-Yield Account
You can help your savings grow with the power of compounding interest. All you have to do is choose the right savings account. While a basic savings account may only earn a measly 1% on deposits, a high-yield account can earn as much as 5%.
This may seem like you are splitting hairs, but a difference of 4% adds up over time. Your bank will calculate interest on your balance, including the accumulated interest from previous months. The bigger your balance grows, the greater your interest payments will be. Once you hit a three-month fund, you could be earning around $40 a month for just keeping your savings in the bank.
Saving is hard, but don’t let the challenge deter you from trying. Start slow, and have a line of credit in your back pocket. These tips can help you feel more secure as you tackle an incredibly challenging financial goal!