Americans’ Emergency Savings Crisis: Building a Solid 6-Month Fund
We all know that having an emergency savings fund is crucial for financial wellness. However, a recent Empower study paints a grim picture: roughly 21% of Americans have no emergency savings, and 37% can’t cover an unexpected expense over $400. While financial experts recommend having three to six months’ worth of living expenses saved, the study found that the median emergency savings for most Americans is a mere $600.
The study also highlights concerning gaps among different demographics. Baby boomers and Gen Xers have saved the most, with median savings of $1,000 and $868, respectively. Millennials and Gen Zers lag behind, with median savings of $500 and $200, respectively. Moreover, men have a median savings of $1,000, which is double that of women.
Despite these troubling statistics, there’s good news: you don’t have to be part of these numbers. With careful planning and dedication, you can build a worthwhile emergency fund. Here’s a step-by-step guide to get you started.
Step 1: Adopt the Right Mindset
“Saving is primarily a mental game that you can win,” says Adam Garcia, founder of The Stock Dork. “Setting aside even a tiny amount of money regularly can eventually lead you to your objective, no matter how low your starting point is. Time and a little self-control are all that is required.”
A positive mindset and the belief that you can achieve your savings goal are crucial.
Step 2: Choose the Right Savings Account
Before you start building your emergency fund, find the right place to stash your cash. A proper emergency fund account should offer a generous interest rate and easy access to your money. That’s why many experts recommend high-yield savings accounts.
“High-yield savings accounts allow you to earn interest rates at a higher level, currently some of the highest we’ve seen in many years,” says Morgan Gray, SVP, head of Bask Bank and consumer segmentation at Texas Capital Bank. “And while you’re earning high rates, your money is still accessible.”
Step 3: Map Out Your Spending
“Take the time to distinguish what your necessary expenses are and what your discretionary expenses are,” advises Katie Ross, EVP of American Consumer Credit Counseling (ACCC). “Your emergency fund should cover your essential needs. After you calculate your total expenses for one month, multiply that number by six to determine how much you need for a six-month emergency fund.”
Step 4: Set Aside a Percentage of Your Paycheck
“Once you’ve determined your monthly expenses, start putting aside money for your emergency fund,” Ross suggests. “If your budget allows, save 5% to 10% of your paycheck. Consider cutting discretionary spending, like on coffee or dining out, for a few months. Redirect any cash gifts, tax returns, or leftover budget money to your emergency fund.”
Step 5: Set Small, Achievable Goals
“Instead of one major savings goal, make multiple smaller ones,” Garcia advises. “Prepare for success from the beginning. Plan for one month’s worth of expenses initially. Once you achieve that, set a slightly bigger goal.”
Step 6: Establish a Long-Term Goal
“Set a long-term savings goal and break it down into smaller daily saving amounts,” says Dr. Kortney Ziegler, CEO and founder of WellMoney. “For example, if you want to save $500 over six months, set a goal of saving approximately $2.75 a day.”
Step 7: Get an Accountability Partner
“The journey to starting and faithfully contributing to an emergency fund is more successful with a partner,” says Lucia Jensen, CEO of WeLoans. Consider working with a financial advisor to stay on track.
Step 8: Reevaluate Subscriptions and Sign Up for Promotions
“Rethink the value of your subscriptions,” advises Owen Wilcox, co-founder of USInstallmentLoans. “Consider canceling or renegotiating subscriptions to free up funds for your emergency fund.”
Step 9: Automate Your Savings
“The simplest method to conserve money is to keep it out of sight and mind,” Garcia says. “Direct deposit can automatically transfer a portion of your paycheck to a separate account for your emergency fund.”
Step 10: Avoid Increasing Monthly Expenditures
“Don’t let a false sense of security lead you to increase your expenses,” Garcia warns. “Stick to your savings plan without adding new expenses.”
Step 11: Tap Into the Gig Economy
If you’re living paycheck to paycheck, consider taking on a side hustle. “This is a time to take advantage of high hourly rates many businesses offer for part-time positions,” says Sean Fox, chief revenue officer at Achieve.
Step 12: Invest Excess Savings
“Once you’ve achieved your emergency fund goal, stop contributing to it and invest the rest,” Garcia recommends. “Your retirement funds are a good place to start, as they’ll grow over time if you’re patient.”
By following these steps, you can build a robust emergency fund and gain peace of mind knowing you’re prepared for the unexpected.
