Secrets to Saving an Emergency Fund, Starting Now

Personal finance expert Alvin Hall covers the whys and hows of financial safety — you don’t want to miss. From Your Money or Your Life: A Practical Guide to Managing and Improving Your Financial Life

Why do I need an emergency fund? The truth is that everyone is subject to financial emergencies.

In fact, statistics show that most people will suffer a significant loss of income at some point in their lives — a loss that can plunge them into near poverty if there’s no financial cushion to fall back on.

The emergency you face could take many forms, including:

  • Being laid off from a job during a time when the industry you are in is contracting and few jobs are available
  • A plant closing or business slowdown that eliminates your job
  • An injury that prevents you from working
  • A devastating or chronic illness
  • An accident that totals your car
  • A mental, emotional, or social problem that afflicts a family member
  • A fire that destroys your home and property
  • An unexpected legal calamity, such as an arrest or a lawsuit
  • An unexpected financial calamity, like being caught in a pyramid or Ponzi scheme

On my television program, we profiled a woman who could be the poster girl for savings. A year before I met her, she and her partner had joint earnings of nearly $100,000. They enjoyed that income to the fullest, taking lavish holidays and buying presents for their small child. They even spent close to $25,000 on a cruise to Jamaica in order to fulfill their dream of being married by a luxury ship’s captain.

Within a few months, everything changed. First, her husband left her. Weeks later, she was laid off from the job she’d held for thirteen years. Because she had no savings, her parents ended up paying her mortgage. Now, as an unemployed single mom, she’s dependent on state benefits to get through each month.

Please don’t say “It could never happen to me.” Deep inside, you know it could. You owe it to yourself and your family to be prepared for such emergencies.

The goal of saving at least six months’ income strikes some people as very ambitious. It’s certainly more than most people have on hand. But I’m convinced it represents a realistic emergency fund, one that will probably allow you to navigate safely through any financial storm you’re likely to encounter. Anything less is all too likely to be quickly depleted in the face of a true emergency.

Accumulating six months’ income won’t happen overnight. For most people who embark on a serious saving program, it will take four to five years to reach this target. That’s all right. Many of life’s worthwhile achievements take that much time: graduating from college or university, getting a career off the ground, raising a child to school age… The key is to set your sights on reaching the goal and be persistent in pursuing it. Once you’ve built up the six month fund, it can remain in savings untouched, ready to spring into action when an emergency arises.

Alvin says…
Begin saving now with the goal of having six to nine months’ after-tax income in a liquid savings account. Liquid means readily accessible at full value. Money invested in property is not liquid, since it may be difficult to sell at a moment’s notice, and if you must sell it quickly, you may not be able to get full value. Your emergency savings should also be in a safe account — one with virtually no risk of loss. Stocks, bonds, and mutual funds carry significant risk of loss and therefore don’t qualify on this score. I recommend using a bank account for your six to nine months’ savings, since such an account is both liquid (you can withdraw it at any time) and very safe (the value of your funds is insured up to the limit set by the FDIC).

Put Saving First
The problem most people have with saving is that they mentally spend their income before they get it. You need to turn off that switch. Here’s how.

Begin by deciding how much you want to save. A good target is 10 percent of your take-home pay. (Ten percent will allow you to build your six-month fund in less than five years.) But if that amount seems like a daunting goal, don’t make that into an excuse to do nothing. Many people can’t start out there. If necessary, start by saving whatever you can afford, even if it’s no more than ten or twenty or fifty dollars a month, and gradually increase the amount as and when you’re able.

Whatever amount you decide to target, take this money out of your paycheck up front, before you spend a penny on anything else. Better still, arrange for automatic withdrawals from your checking account into a savings account. Most banks will be happy to set up such a plan for you.

Deposit this “top 10 percent” into your account and then pretend that this account doesn’t exist; don’t even get an ATM card for it. If the bank sends you one anyway, cut it up. And when making your spending plans, don’t factor this money into your income. You know the old saying: Out of sight, out of mind. Keep your savings account out of sight, and soon it will slip out of your mind… except when you look up your balance, to congratulate yourself on how nicely it’s growing.

Saving secrets. Here are some other tricks that can help make saving easy…or at least easier:

  • Maintain your savings account in a different bank from your checking account, preferably one that’s a few blocks out of your way rather that just a step or two from your office door or your home. This helps to create a psychological barrier that discourages you from withdrawing and spending. Incidentally, searching out a new bank will give you an opportunity to investigate opportunities for earning a better interest rate on your money — a second benefit that’s not to be overlooked.
  • After launching your savings plan, look for opportunities to increase the amount you set aside each week or month. For example, earmark your next salary raise entirely for savings if you can. This is surprisingly easy to do — after all, you’ve been living on the lower amount all along. Just pretend you never got a raise, and enjoy watching how quickly your savings increase. Do the same with end-of-year bonuses, cash gifts or inheritances from relatives, and other windfalls.
  • Finally, change your debt habit into a saving habit. Here’s what I mean: Suppose you’ve been setting aside an amount each month to pay down your credit cards — $450, let’s say. Once you get all your debt paid off, start banking the same $450. You won’t miss the money, since you haven’t been spending it anyway. Use the same technique when you’ve finished paying off a car loan or your mortgage.

Putting fun into saving. Does all of this sound rather self denying and harsh? Perhaps you want to protest, the way small children do, “I never get to have any fun!” Well, consider building some fun into your savings program by tying it to giving yourself something you want. Decide in advance what categories of spending are most gratifying and enjoyable for you — the desserts of your daily financial diet. Then link that kind of spending to saving.

For example, if clothes are your weakness, then every time you spend money on a piece of clothing, deposit the exact same amount into your savings account. Do this with whatever is your weakness — buying books, going to the movies, splurging on fancy tools or cosmetics, whatever. Thus, the pleasure of treating yourself will be associated with (and increased by) the happiness of building up your cash reserve. If, however, you can’t deposit an equal amount of money into your savings account, then you can’t buy the thing you want. That’s the pact you must make and keep with yourself.

Another approach is to treat yourself once you’ve reached certain savings targets. These targets should be quarterly or longer. Only when you have saved that amount or more can you treat yourself to something you can easily afford. It’s important that the treat provide you with enough long-term satisfaction to motivate you to reach your next savings target.

Alvin Hall, author of Your Money or Your Life: A Practical Guide to Managing and Improving Your Financial Life (Copyright © 2009 by Alvin Hall), has been training and counseling a wide range of financial service companies and institutions in the United States and around the world for the last twenty years. He lives in New York City.



6 thoughts on “Secrets to Saving an Emergency Fund, Starting Now

  1. I think we can all find a little money to save it’s just about being creative. If you don’t have enough then do extra jobs – mystery shop, sell unwanted items on Ebay, write a blog, sell books on Amazon or teach a subject you enjoy and know about. It all helps.

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