What is the state of your emergency savings? For more than 25% of Americans, they have more credit card debt compared to their emergency fund. To be fair, the report mentioned that people are more concerned about paying off their debts than saving up for their emergency fund. But that can be dangerous.
Imagine if these people encounter an emergency, how will they hope to survive? If that emergency involved losing their job, how can they pay for their credit card debt? Their emergency fund can’t even pay for that.
Regardless if you have a lot of debts or not, you need emergency savings. It will save you a lot of headaches in the future.
But how can you make your emergency fund grow while you’re paying off your credit card debts?
Steps to make your emergency savings bigger
Admittedly, giving your emergency fund a boost will be hard if you are trying to pay off your credit cards at the same time. But if you’re following the right steps, you should be able to do it without issues. There will be sacrifices. But it should be worth it if you know that you’ll feel more financially secure because of it.
So what are the steps that you should follow to make your emergency savings grow?
Step 1: Analyze how much you need
It’s important to start with the amount that you need to save. How much do you really need to save? For most people, their emergency fund is 3 to 6 months worth of their expenses. Others say that you should go as high as 9 to 12 months. After all, during the Great Recession, some people were unemployed for more than 6 months. You need to consider that. If you lose your job, how long should your emergency fund sustain you and your family?
The safe amount would probably be between 6 to 9 months. Base this on an amount that you spend comfortably – not a frugal budget. So if you can live a comfortable life on $5,000 a month, then you need between $30,000 to $45,000 in your savings account. In case something happens, this amount can last longer if you choose to be frugal when you use it.
Step 2: Study your income and expenses
After identifying your emergency savings target, it’s time for you to check how much you can afford to save. Obviously, you need to spend on what your family needs. You also have to continue paying off your debts. So make sure you analyze your income and expenses.
Start by looking at how you spend your money. Is there a way for you to manage your variable expenses so you can free up more money? Are there expenses you can cut back on because you don’t need it to survive? Take a look at all your bills. Maybe there are bills that you can let go of. Whatever amount you free up from your expenses can be used to add to your emergency savings.
The next thing you do is to look at your income. How much are you taking home? Is that enough for you? Maybe you can find other sources of income. This can be temporary – until you have reached the target amount in your emergency fund. Or you can keep that second source of income to make your finances more secure.
Step 3: Look at your debts
It’s also a good idea to look at your debts. If you want to save money, the best way to do that is to increase your payments. The faster you can pay off your debts, the less you have to pay towards the interest.
But if you are trying to boost your emergency funds, this is not possible.
What you need is to put your debts in the backseat for now. That does not mean you won’t pay it off. You’ll continue to pay it off. But you might have to negotiate a lower monthly payment for a couple of months. After you’ve gotten a head start on your emergency savings, you can increase your debt payments once more.
Step 4: Create a savings plan
If you have a lot of catching up to do when it comes to your emergency fund, you might want to create a savings plan. This will make it easier for you to determine how long it’ll take for you to meet your target. Like if you need $45,000 in your emergency fund and you can only contribute $500 a month, how long will it take for you to save up? The savings plan will help guide you throughout this goal. If you need to come up with strategies to multiply your savings, this plan will help you with that. It will also show you how far you’ve come in your saving goal.
Step 5: Follow the plan strictly
Once you’ve created the savings plan, you need to stick to it. Just follow the plan. It’ll be your guide while saving money for your emergency fund. If your monthly contribution is $500, you have to stick to that amount. That’s how you can be certain that you can reach your goal.
You also need this plan because you can bet that it would be hard to keep your hands off your savings. Especially if you can see that the money is growing. There will be a lot of temptation to use it for something else. You have to fight this. You’ll be thankful that you saved up for this when you land in a real emergency.
Tips when increasing your emergency savings
Did you know that when 2020 entered, almost 50% of adults said they can even cover an emergency worth $1000? With everything that happened after, with the pandemic and the recession, one wonders how these people survived.
This is the reason why you need to make sure that you have enough money in your emergency savings.
But as mentioned, it can be hard to stick to your savings – but if you want to have a secure future, you need to control yourself. It helps to remember why you need to do this. If you know the reason why having emergency savings is important, you should be able to keep saving the money instead of spending it.
Here are tips that will make this easier.
Be cautious of every expense you make
First, you have to be really cautious about the way you spend your money. Try not to be very reckless with it. While you’re trying to save up, restrict your spending on what is necessary. The less you spend, the more you can save. So if you don’t need it to survive, try not to use the money. Add it to your emergency savings instead. The more you can contribute, the faster you can reach your targets.
Find ways to increase your income
Apart from cutting back on your expenses, it’s also a good idea to increase your income. Find a way to earn more money. There are many options for you to earn extra. Go online and find a freelancing job. Bake or cook goodies that you can sell. Working a couple of hours a week will help you earn the extra money that will help you save more each month.
But that’s not the only benefit. Having another source of income will also make you feel more secure. In case something happens to your primary source of income, you still have another income coming in.