2 strategies to build an emergency fund quickly, from a call for proposals
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- Emergency savings are essential – they provide a cushion if you lose your job or face a big expense.
- If you are creating an emergency fund, consider briefly diverting your pension contributions.
- Tracking your spending and noting where you go too far can also help you save more.
- Read more stories from Personal Finance Insider.
While setting up an emergency fund isn’t usually the most exciting thing to do, it’s still a critical part of any successful financial plan.
There are several opinions on what type of account is best suited to hold an emergency fund and the appropriate amount, but that is not the purpose of this article. My goal here is to provide advice on some ways to quickly build an emergency fund if this is an area of your financial life that needs to improve.
1. Temporarily suspend your contributions to the pension plan
Let me first say that I am a strong supporter of people who contribute as much as they can to their employer’s pension plan (especially when the employer has a matching contribution policy) because it is about a great long-term savings vehicle that can dramatically increase wealth over time. That being said, unfortunately I see many people simply following this general advice without considering other important areas of their financial plans, which could include creating an adequate emergency fund.
Saving for retirement is crucial for success in the future, but these types of long-term goals can be derailed by unforeseen events now, which underscores the importance of maintaining an emergency fund. Some examples of unforeseen events might include the loss of a job and unscheduled repairs to the home, which can both put immediate stress on a person’s finances and ultimately mean not having the flexibility to achieve d ‘other goals in the future.
A person can temporarily suspend contributions to the pension plan, set up the emergency fund reserve account at the appropriate amount, and then resume contributions to their employer plan. Then, if an urgent expense arises, that person can cover the cost without having to go into debt.
Consider the following example. John and Mary, a married couple, have a combined annual income of $ 200,000 and both contribute 15% of their salary (total of $ 30,000) to the employer’s pension plans. Unfortunately, they do not maintain the appropriate amount of emergency funds, which is three months of living expenses given their particular circumstances. After careful consideration with their financial planner, they determined that having $ 25,000 in a savings account would be sufficient. Currently, they only have $ 20,000 in place, which creates a shortfall of $ 5,000.
Together, John and Mary contribute a total of $ 2,500 per month to their retirement accounts. They decided to suspend these contributions for two months and increased their savings account by $ 5,000 instead. Subsequently, they reverted to contributions to the pension plan once they achieved their immediate goal of an adequate emergency fund account.
2. Take the time to assess your actual expenses
This technique for saving more in an emergency fund is more about behavior with money than the first tip, which was more of a technical strategy. Often people think they know what they are spending, but really have no idea. Also, valuing expenses is not a fun exercise, so unfortunately this action is sometimes avoided by people. In some cases, people don’t “really want to know the truth” because once they do, there will be no more excuses for some of their behavior with money.
Taking the time to assess actual spending lets you know where an individual’s dollars are going each month, and often it shows areas where spending is unnecessarily higher than it should be. Going through this type of exercise quickly informs an individual how much more they can save, which can translate into additional savings in an emergency fund.
Consider the following example. Mark met his financial planner, Sue, who asked him to bring all of his bank and credit card statements from the past three months to their annual review meeting. Sue has previously recommended that Mark increase the amount of his emergency fund, but he has not been diligent in his progress towards that particular goal. Over the years, Mark had come to estimate the amount of his expenses, which is why Sue went one step further to obtain more precise information.
After the exam, Mark realized that the amount of money spent eating out each day was extremely high. Since this is something he enjoys and helps reduce his stress during the day, he will certainly continue to eat out for lunch, but he has decided to cut back on some of his spending. It was only after realizing the high amount of spending in this area that Mark made a real commitment to making a change, which ultimately helped him save more for his emergency fund in the future. .