Have you ever woken up to a freezing cold house because your heating system stopped working? Or gotten stuck on the road with a car that wouldn’t start? We all encounter our share of inconveniences in life, but when those nuisances cost money, they can easily become major points of stress.
That’s why we all need emergency savings to protect ourselves from the unknown. But new Bankrate data tells us something we already knew: Most Americans are woefully unprepared to handle an unplanned bill.
Experts agree that for true protection from financial emergencies, it’s best to sock away up to six months’ worth of living expenses in the bank. For the typical household in a major metro area, that’s about $23,000. But the average American has less than $4,000 in savings, while 57 percent of U.S. adults have less than $1,000 to their names.
If you’re behind on emergency savings, you shouldn’t wait to build that safety net since you never know when an unanticipated expense will wreak havoc on your finances. Here are a few tips for ramping up your savings.
1. Create, and maintain, a budget
Do you follow a budget? Most Americans don’t. But without one, you’ll have a hard time tracking your expenses and identifying ways to save. So if you’re not using a budget, create one by listing your current bills and comparing the amount you spend to the amount you earn. If there’s no room left over for savings, it means you’re spending too much, at which point you’ll need to look at your various expense categories and see which ones can be cut. Maybe you’ll need to downsize your living space or unload the vehicle you enjoy having but technically don’t need. Or maybe you’ll fare better making smaller changes, like reducing leisure spending, which don’t impact your lifestyle quite as heavily. The point is to understand where your money is going and find ways to spend less of it.
2. Get a side job
Some people overspend on a regular basis and therefore don’t manage to bank any money by month’s end. But if you’re that person who genuinely doesn’t indulge in luxuries but is still struggling to save, the solution might be a side hustle. The benefit of working a second gig is that the money you earn isn’t cash you were counting on to pay the bills. Therefore, it stands to reason that you should have no problem taking every post-tax penny you earn and sticking it directly into the bank.
3. Stockpile whatever extra money comes your way
Most of us rely on our paychecks to pay our expenses. But throughout the year, you might find yourself in the lucky position of getting some extra cash. Maybe your company will issue you a bonus for a job well done. Or maybe a generous relative will shower you with an envelope of greenbacks on your birthday. No matter where that money comes from, resist the urge to blow it and put it into savings instead. The same holds true the next time you get a raise, tax refund, or inheritance.
The problem with not having savings is that it puts you at risk of racking up debt the moment a surprise bill lands in your lap. And that means losing money to interest when you can’t afford to be doing so. A better bet? Do your best to build your emergency fund slowly but surely. You don’t need to amass six months’ worth of living costs in a matter of weeks or months — no one expects you to do that. But if you commit to building that safety net, you’ll get there eventually, and hopefully in time to address the next financial disaster that strikes.