If an emergency costing $500 or more occurred tomorrow, could you cover the expense of going into debt or getting behind on bills? According to Bank of America, 57% of millennials aged 27 – 37 have a savings goal, 63% are saving, and 54% budget their money. While some millennials are money savvy, others can’t cover a financial emergency of $500 or more.
In 2017, GoBankingRates survey found that millennials aged 18 to 24 years old have less than $1000 in their savings account and almost have had no savings what so ever. Having an emergency fund is vital to financial stability because if an emergency occurs, you are prepared versus landing yourself in debt or getting behind in bills. Not having a financial safety net increases your chance of living paycheck to paycheck and decreases financial stress. Having less financial stress allows you to manage your finances confidently.
What is an Emergency Fund?
An emergency fund consists of money set aside for unexpected events that occur in life such as car accidents, hospital visits, housing issues, employment termination, etc. Emergency funds can provide the financial buffer keeping you safe from financial disaster. Having an emergency fund is the first step for many towards financial stability and getting out of debt. Living paycheck to paycheck, and being unable to move towards your own goals is depressing and having an emergency fund allows you the freedom and stability many people crave.
What is an Emergency?
First, you must define what an emergency is or else you will be spending the money every time something feels like an emergency. I am sorry, but those cute boots you’ve been eyeing going on sale is not an emergency. To determine if something is an emergency ask yourself three questions:
- Is it unexpected?
- Is it necessary?
- Is it urgent?
Another way is to pre-determine the situations in which you will dip into your emergency fund. Make a list of the conditions that you determine to be an emergency such as losing a job, car accident, etc., etc.
How Much Money Do You Need?
Most financial gurus will state that six months of income or expenses should be kept in a savings account. While that may sound like a lot, it is important to remember that this money is for absolute emergencies. For example, if you bring home $3000 a month from income, then that means that six months of income would be $18,000. Of course, $18,000 is a lot of money and thinking about saving that much money can be daunting. Just remember that you don’t have to accumulate all that at one time.
How to Build the Emergency Fund?
- Set a time frame in which you believe you could save that amount, set some goals and go for it. Use SMART (specific, measurable, attainable, relevant, and timely) goals to reach your end point.
- Break the amount down into smaller subgoals. For example using the $18,000 you may want to break this amount into the following subgoals: $500, $1000, $2000, $5000, $8000, $10K, $15K, $18K.
- Set up monthly savings goals so that you get into the habit of saving regularly. Even if you are only saving $100 a month, you will reach $1000 within 11 months.
- Save your tax refund. Most individuals get an income tax refund yearly and moving that money to your savings account could easily assist in quickly building your emergency fund.
- Budget. Budget. Budget. If you are on a budget, you may find some extra money that you were not aware of. (Budgeting post coming soon. Hint! Hint!)
- Automate! Automate! Automate! Set up your direct deposit or your checking account so that money is automatically moved so that you don’t even realize it is there. Money not seen or remembered is hard to spend.
Where to Keep the Savings Account?
If you have access to a high-interest saving account automating your savings to that account would earn you some interest while you are savings which help with the building. But remember that the account should be easily accessible so that you can access it in a pinch. Additionally, you may want to keep it separate from other monies so that you don’t risk spending it.
What Apps Can Help Me Save?
There are a ton of apps for the Android and iOS devices that help to build savings and budget. Here are some helpful ones:
- Qapital (https://www.qapital.com/) making saving easy and fun. Download the app, link to your banking account set the rules, and keep away. Qapital is completely free. You can choose from the following rules:
– Roundup Rules
– Set and forget Rules
– Spend Less Rules
– Guilty Pleasure Rules
– Customizable Rules
- Digit (https://digit.co/) is a complex app that analyzes your spending and automatically saves every day. The app also allows for goal setting so you can set the goal and forget about it. Digit is free for 30 days then it is just $2.99 a month.
- Tip Yourself (https://www.tipyourself.com/) is an only savings jar were money is added. You decide on when you want to tip yourself and just hit the button inside of the app. The app and service are completely free.