A financial crisis can happen to anyone at any time.
It could stem from a nationwide economic downfall, a malfunctioning vehicle motor, or a medical expense that’s not covered by insurance. To avoid being caught off guard financially, most experts recommend having an emergency savings fund of at least three to six months’ living expenses on hand.
An emergency savings fund provides priceless peace of mind. But what happens when you actually have to spend that money, and you need to replenish your account? Here are our tips for rebuilding your savings so you’ll be ready for the next financial crisis.
Start with baby steps
When you calculate the actual total of three to six months of living expenses, that number can seem overwhelming. Mortgage or rent, utilities, debt payments, groceries … it adds up quickly. Just remember, though, that your first fund wasn’t built overnight, and this one doesn’t have to be, either.
When it comes to savings, personal finance guru Dave Ramsey recommends taking “baby steps” — the first of which is saving up $1,000. Although even that number can be intimidating, a $1,000 safety net is achievable with just a little focus and effort.
One way to kickstart your savings is to look around your home for things to sell online, at a local consignment shop, or directly to your neighbors. Sites like ThredUp, Poshmark, eBay, and Facebook Marketplace make it easy to rid your house of unwanted clothing, furniture, books, or knick-knacks and earn a little cash doing it.
Another option is securing a temporary side gig. Consider contracting as a delivery or ride share driver, house sitter, dog walker, or house cleaner. Perhaps you could turn your hobby or talent into a short-term freelance opportunity, selling your creations, teaching others, or providing your services.
Don’t forget, though, that the proceeds from these activities — no matter how small — are earmarked for your emergency fund, not for refilling your closet or buying more art supplies!
Create (and stick to) a budget
A financial crisis can call attention to unnecessary expenses. For example, during the pandemic lots of folks realized that pedicures, gym memberships, and daily restaurant lunches were truly luxuries and not actually necessities. Creating a budget can help you differentiate between the two.
A budget can be as simple or as elaborate as you’d like. However, it should be recorded in some form or fashion, whether it’s written in a notebook or managed in digital format. Seeing a listing of your income and expenses can have a big psychological impact, especially when you realize how much money you could have left after deducting only your necessary spending.
To ensure that you’re working toward rebuilding your emergency savings, your budget should always include a set amount devoted to that fund. Don’t just write it down, though. Make sure you set up an automated transfer into a savings account designated for emergencies only. When you’ve built up your three to six months of savings, divert that transfer into another savings option like an Individual Retirement Account (IRA) or a money market account to multiply the future return on your investment.
Temporarily slash your expenses
Your budget can still include occasional indulgences, but while you’re rebuilding your emergency savings fund, those should be few and far between. You might even consider making significant cuts, like temporarily cancelling your Netflix subscription or foregoing this year’s vacation. Skipping your morning Starbucks runs, avoiding online shopping sites, and limiting fast food and restaurant expenses for six months can also make a difference.
If you’ve already minimized these kinds of expenses, though, there are still other ways to find extra money in your budget for your safety net account. Although paying off debt is incredibly important, consider making only the minimum payments on credit cards or other monthly bills. If you’re used to paying extra toward your debt balance or paying off cards in full each month, earmark that money for your emergency savings instead. This is not a long-term financial fix, but in the short run it can go a long way toward replenishing your emergency account.
MAX Credit Union is a full-service financial institution serving Central and East Alabama, including Montgomery, AL; Auburn, AL; Opelika, AL; Prattville, AL; Wetumpka, AL; and Troy, AL.