True story: I built my emergency fund to 9 months of my yearly income!
Americans are not saving money. According to an article published on CNBC, 78% of U.S. workers live paycheck to paycheck. Another survey conducted by GO Banking Rates in 2019 found that 69% of Americans had less than $1000 in total savings, and 34% had no savings at all.
Living paycheck to paycheck is frightening, but how many of us are part of those percentages listed? It may be overwhelming but saving is possible. It’s not easy, but it can be done.
I certainly understand how it feels. I was unemployed during the 2008 housing meltdown, and we are seeing it again today with the COVID-19 pandemic. As of October 2019, our national unemployment rate was 6.9% with over 38 million people going unemployed in a matter of 4–6 weeks.
Most of us are not prepared for such turbulence emotionally and financially. They are nerve-wracking and nail-biting moments for us. When I experienced this, I had more expenses than my meager income could support. I was running out of cash faster than Jerry could outrun Tom. I had used up all my savings and had to cut back to the bare minimum. It was ramen noodles and no social life for a while.
Times were tough, and some days were quite depressing. I needed a sound support system and strong will to push ahead, and sometimes there seemed no end in sight. Eventually, as they say, I was able to see a light at the end of the tunnel. I finally got out of the rut and was able to find a job. I made a promise to myself I’d do my best to ensure I’d never be in such a position again. While nothing is ever certain in life, I’ve taken the necessary steps to, as much as possible, prepare myself financially.
I’m not a financial whiz, but my past experiences forced me to develop solutions to my problems by putting measures in place to build an emergency fund. I want to help you do the same. It’s going to take a mindset shift and disciplined execution, but it’s necessary. We cannot control or predict economic downturns, but we can plan for them. See, saving consistently is about more than just being frugal. If you do not consistently save, or you will not have a financial cushion. Without that, you will not be able to invest. And if you cannot invest, you cannot grow your wealth, or the collective wealth of your community. It’s bigger than you. To solve our problems, we must act, and I’m here to help you take a step in the right direction with a plan on how to build up your emergency fund. Let’s do this!
1. First, you must figure out your income to expense ratio. Take a thorough inventory of your finances and audit yourself. You can itemize everything on a spreadsheet or download the one I’ve created here. If you choose to automate the process, a few apps can help you do that, such as Mint and EveryDollar.
2. Next, you need to get a clear picture of your finances by creating a budget. Remember that your budget should accurately allocate your income and expenses. Using this spreadsheet or use one of the apps mentioned above to guide you with an automated process.
A simple rule of thumb is to follow the 50/30/20 rule. Split your after-tax income, and spend 50% on needs (i.e., bills, utilities, groceries), 30% on wants (i.e., shopping, hobbies, extracurricular), and allocating 20% to savings (your emergency fund).
Most importantly: identify all the unnecessary items in your expenses that you can live without, such as additional subscriptions, and eliminate them immediately.
3. Now that you have an itemized budget, it’s time to create an actionable plan for your emergency fund. If you want to build up your emergency savings as fast as I did, you have to live a little more frugal and disciplined than the average person. I’d recommend switching around the 30/20 from 30(wants)/20(savings) to 30(savings)/20(wants). Try it out for a couple of months and see how it works out.
Remember, the goal here is to build up your emergency fund as quickly as possible, which typically consists of a minimum of 3–6 months’ worth of your expenses (the 50/30 portion) mentioned in the last bullet point. In some cases, depending on how much you earn or how disciplined or determined you are, you can extend that to 9–12 months for peace of mind. Trust me; it matters (speaking from experience); make the necessary sacrifices if you can. It is worth it.
4. Once you have determined that number you want to deduct from your paychecks or income, you need to ensure that you put it in an account that works best for you. If you don’t already have one, open an online savings account with better returns than your checking account. There are also quite a few useful apps you can download. Link this to your bank checking account and create a recurring monthly transfer from your checking to savings or your app of choice. Here are a few really good options:
Banks:
Apps:
Whatever option you decide to use, do your best to automate the process based on your pay cycles and stay disciplined.
Pro tip: If you’re struggling with putting money aside from what you currently earn, get a side hustle or come up with a way to make extra money. You can read all about it in my blog post here.
Now that you have a plan, execute it and be relentless. You will face many challenges; do not give up even if the complexities of life deter you. Stay the course as best as you possibly can.
Be willing to make sacrifices and save as much as you can while earning; it’s worth every penny saved. Having an emergency fund will provide you so much peace of mind! Should life’s turbulent times happen, you are well prepared to tackle them head-on. Good luck, and I hope you found this useful.
References:
1. Martin, Emmie. “The government shutdown spotlights a bigger issue: 78% of US workers live paycheck to paycheck.” CNBC. https://www.cnbc.com/2019/01/09/shutdown-highlights-that-4-in-5-us-workers-live-paycheck-to-paycheck.html. January 9, 2019
2. Huddleston, Cameron. “Survey: 69% of Americans Have Less Than $1,000 in Savings.” https://www.gobankingrates.com/saving-money/savings-advice/americans-have-less-than-1000-in-savings/. December 16, 2019.
Cecil Williams is a writer and rental real esatate investor. He
created The Cimifly Chronicles to help members of his community get
out of debt, increase their income and invest in real estate. Cecil is
married with a son and based in Atlanta, GA.
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