Research shows that almost 60% of Americans have less than $1,000 in readily available Emergency Fund cash savings. If you want to be protected from whatever the future may bring, then an emergency fund is essential.
Almost 800,000 federal employees are either furloughed or working without pay during the current government shutdown. If the shutdown goes unresolved this week, federal employees and contractors will miss their second January paycheck.
Tips for Building Your emergency Fund
Standard investments won’t be of immediate help in an emergency. Use the following tips to build a cash savings account to get you through uncertain times.
- Aim for $1000 and go from there. Financial experts recommend that you should save one month’s worth of salary as a bare minimum. Set an initial savings target of $1000. Once you hit the first milestone, you can continue to build your fund.
- Balance debt repayments with savings. When you reach your initial $1000 target, continue to save while also focusing on debt reduction. The less debt you have in a financial emergency, the less reliant you will be on your savings.
- Make small lifestyle changes to boost savings. Cut out anything that you possibly can from your daily spending to help build an emergency fund. Eliminating takeout coffees and lunches could put extra money into your savings account. Other luxuries like online subscriptions (Netflix etc.) could be temporarily eliminated while you build up an emergency savings account.
- Focus on a low-risk account. An emergency savings fund is a cash investment. Don’t put the money into anything that isn’t readily available. This typically means choosing a checking or high-interest everyday savings account. Open a separate account so that you can keep your emergency fund isolated from your daily banking.
- Pay dividends into your savings. To build up a savings account quickly, consider depositing dividends from investments until you have hit your first milestone. Once you are comfortable with what you have saved, you can reallocate your dividend payments for re-investment or other purchases.
- Know when to stop. Readily available cash savings are important, but you should also focus on other investments that can be used to grow your wealth. More is better in terms of an emergency fund, but there comes a point of diminishing returns. If you’ve saved the equivalent of six-month’s income, then you could start to taper off your emergency savings and begin to focus on stocks and bonds, more debt reduction, or even long-term savings in a Certificate of Deposit.
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