The beginning of a new year is a great time to start setting goals that will help you make your life better. Along with your goals to exercise more and spend less time on social media, make sure you set a financial goal as well. Setting financial goals can give you something to work toward so you can get one step closer to feeling more financially stable.
If you need a great idea for a financial goal for 2021, consider building up your emergency fund. Why should creating an emergency fund be a top priority? Having an extra cash buffer can help you if any emergency expenses come up, such as a broken furnace, a lost job, a car accident, or unexpected medical bills.
Any number of expenses can crop up, and if you’re living paycheck to paycheck with little savings, like so many Americans, you’re vulnerable. Give yourself the peace of mind that comes with preparing for future possibilities by building an emergency fund.
Changes in Personal Savings in 2020
This is probably an understatement, but 2020 was a unique year. A global pandemic changed the way we work, learn, celebrate, and connect with friends and family. This year has also brought changes in how Americans spend their money. In fact, 64% of Americans say they’ve changed their spending habits.
How so? The data reports that people are spending less on transportation, entertainment, and personal care, and more on health, food, home repairs and maintenance, investments, pets, and education. This makes sense—with the pandemic keeping everyone home, fewer people are traveling, and more are exercising and ordering takeout at home.
If you find yourself changing your spending habits, you might try funneling anything you’re saving into an emergency fund. Start saving up the money you would have spent on gas or going out to the movies.
Why Emergency Funds Are Important
Why is it wise to establish an emergency fund for the upcoming year? Honestly, any year is a great time for saving money. It’s always a good idea to start and build up an emergency fund. You never know when you’re going to need the money—an emergency can happen at any time. An emergency fund gives you a buffer against financial hardship and gives you long-term financial security.
If you have no emergency savings and you lose your job or need to make some unexpected repairs on your home or car, the unforeseen expense can be devastating. You may need to miss some payments on your bills or debts, go without other needed expenses, or sell your car to pay the bill.
An emergency fund gives you a sense of security, knowing that you have some money saved away so unexpected bills don’t derail your budget or jeopardize your investments and assets. Invest in your financial freedom and independence with an emergency fund.
How Much to Save
If you’re ready to start building up an emergency fund, you might wonder exactly how much you should aim to put into it. Rather than setting a one-size-fits-all number goal, such as $5,000, you want to save enough to cover your living expenses for three to six months.
Figure this out by tracking how much you spend in a month, particularly on essential expenses such as rent or mortgage, utility bills, food, debt payments, and other bills. Start by saving enough money to live off of for three months, then gradually build it up to six months or more.
What Should Your Emergency Fund Cover?
Your emergency fund should help you out in case of an emergency expense or situation. Whenever possible, only a genuine emergency would be a good time to spend money from your emergency fund. So, for example, you would not use it to pay for a vacation, college tuition, or down payment on a house, as important as these things are. Your emergency fund is separate from other savings goals. It is in place to support you if you come across an essential, unexpected expense you can’t otherwise afford or a situation where you might lose your income.
- The kind of emergency you might plan for could be a job loss—too many Americans are getting laid off or furloughed during the pandemic, and we have yet to see major economic recovery.
- You may have a medical emergency that takes you out of the workforce and lands you with major medical bills, or a car accident with an uninsured driver leaves you needing to get a new car so you can get to work.
- Your house may have a broken pipe or gas leak needing major repairs and even relocation until it’s safe to come back.
- There’s also always the possibility of a natural disaster such as a hurricane, wildfire, earthquake, or tornado upending your life.
Having money set aside to help you with your expenses during an emergency can give you true peace of mind.
Where Should I Put My Emergency Fund Money?
You want your emergency fund to be liquid—that is, easy to access and spend. You don’t want it to be sitting in a piggy bank or a bag under your mattress. Put it in the bank, ideally a checking account you can access with a debit card or by writing a check. You can consider a savings account that can easily be transferred into a checking account, but avoid putting it in any sort of investment account, like a CD.
You want to be able to reach the money when you need it without too much of a headache, but you also want to keep it separate so you aren’t tempted to use it for a non-emergency. Keep it separate from your other bank accounts, and keep the connected debit card at home in a safe (but accessible) location.
Plan for a Rainy Day
Why should creating an emergency fund be a top priority in 2021? Really, an emergency fund is essential in any year, at any time. The best time to start saving is now. If the pattern from 2020 holds, 2021 is likely to be a time of financial instability and changes in how we use our money. This makes it a great year to set a resolution to start building an emergency savings account.
If you have an emergency expense that drains your fund or a crisis hits before your fund is fully in place, apply online for a loan from Power Finance Texas. We can help you out with various options for getting cash fast when you’re in a tight