Yes, You Should Actually Start an Emergency Fund This Year

And this is how to put money in it.

Here’s a scary stat: According to the Federal Reserve, 40% of Americans don’t have a spare $400 to cover an emergency cost. That’s pretty demoralizing, considering the term “emergency expense” casts a wide net of situations.

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Whether the emergency has to do with your car, family, health, or job, or it’s some unexpected home repairs or surprise moves, there are plenty of reasons to set some dough aside for life’s rockier moments. Because if an emergency savings account is anything, it’s clutch. “None of us are exempt from life throwing crap at us — we are all subject to emergencies,” says Bernadette Anat, a financial literacy educator in San Francisco. “And the fact of the matter is emergencies often cost money.”

There are two solid reasons for building that “rainy-day” account. “Not only is it important in a tactical sense to have a certain amount of money set aside to help with whatever emergencies come up, but it also provides emotional support,” Anat says, adding that not having emergency money causes a low-boil anxiety that we all become accustomed to. But having those funds frees you up to make other financial decisions — whether as small as a weekend indulgence or as big as a career change — that you couldn’t make otherwise.

Why People Aren’t Saving

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The reality isn’t that people don’t want to save; it’s that they can’t. “There’s the hard and cold fact that people aren’t earning enough money,” Anat says. “So many people are living paycheck to paycheck (59% of Americans, in fact), not just because that’s all they know how to do, but because wages aren’t livable. The wage gap is real, and people live in areas where the cost of living is astronomically high.”

For those living in disadvantaged communities, sometimes even the thought of saving is too much. “When you’re talking about people of color, people living under the poverty line, it’s very difficult to put money away when you literally just have money to survive,” Anat says. “And when that happens for cycles and cycles, and then somebody tells you you should really have an emergency savings, it’s like, ‘OK, where am I going to pull that money? Out of my butt? How can I squeeze any more pennies out of my minimum wage?’”

So, first and foremost, there are systemic changes that need to happen to give people a fighting financial chance. Some are already in motion — 24 states are raising the minimum wage in 2020, for example — but there’s still progress to be made.

How to Start Saving

Yes, the idea of saving thousands of dollars might feel unattainable — but you can start. Below are the action steps you can put in place today to help you better position yourself financially.

1. Put Other Financial Game Plans on Hold

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Between student loans, credit card debt, retirement planning, investing, and emergency savings, there are a lot of ways you can divide your money. “Contrary to popular opinion, you need to build the emergency fund before you get too aggressive about retirement savings or paying down credit card debt, and certainly before aggressively paying down student loan debt,” advises Joy Liu, financial coach and head trainer at The Financial Gym in New York City. “The emergency fund is always the first thing we recommend, and sometimes it gets overlooked because it’s a lot less sexy than paying those other things.”

Take your credit card. It might seem like you should pay that off ASAP, and while you should definitely be making your minimum payments, Liu says you should still save. “You need the emergency fund to prevent getting further into credit card debt, or getting into it again once the card is paid off, because not having savings is what started the problem in the first place.”

Same goes for investing. Anat says some believe you should invest any extra money you have, but “the whole point of emergency savings is you can reach out to it in an emergency. And if it’s stuck in the marketplace or tied up in an investment, not only is it more complicated to access, but that stuff could tank. Remember: Emergency savings money is not money to mess with, or, as Anat puts more eloquently, “That’s ‘mama needs it for a rainy-day’ money.”

2. Pay Yourself First

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Every time that paycheck hits, there’s one thing most people do first: Spend it. “What happens usually is we do our budget with all of our expenses first and then say we’ll save what’s left over,” Liu says. “But there isn’t usually anything left over.”

Which is why it’s better to flip the script and pay yourself first. That means as soon as money hits your account, aim to put a consistent percentage — ideally a minimum of 10% — into your emergency savings.

One of the best ways to do that? Make someone else do it. “The absolute easiest way to save money is to direct some of your paycheck into a separate savings account before it even gets to you,” Anat says. That way, before there’s any opportunity for money to be spent, it’s auto-transferred into another account. “It’s better to receive money knowing the saving has already been taken care of, so whatever money you get you can divide amongst your bills and spend guilt-free.”

While many employers have the ability to do this for you, there are also apps at the ready. With Digit, for example, you can define your savings goal and it’ll put money away automatically. “[It’ll even] monitor the way you spend and the way money comes in, so the algorithm will know when to take money away without interrupting your spending flow,” Anat says. Millennial-friendly banks like Ally and Simple also have auto-save features, allowing you to dictate in advance when and how much they should deposit into your emergency account.

3. Put Money in a Separate Bank

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Another easy way to level up your financial game is to open your emergency savings account at an entirely different bank. The reason is twofold: First, to simply make it less convenient to transfer into checking, as it takes three to five days for it to land in your spending account. That’s time for you to reflect on why you needed to move it in the first place, so you can potentially adjust your spending habits next time, Liu says. “It creates stronger boundaries between ‘This is the money I plan to spend on day-to-day expenses, and this is the money I do not plan to spend.’”

4. Earn That Interest

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You also want the money to go into a high-yield savings account. “The words ‘high yield’ really just mean your interest rate is higher than the national average,” Anat says. Interest rate is the percentage of money the bank gives you as a thank-you for letting them hold your money; regular savings accounts have extremely low interest rates (somewhere around 0.14% on average, Anat says), whereas high-yield savings accounts can have rates that range anywhere from 1% to 2%. It may not seem like much at first, “but when you get to $1K, that’s a free $10–20 [per month] that gets deposited into your savings just for having money there,” Liu says. “I’d rather do that than make 10 cents.”

When choosing a high-yield savings, Anat suggests looking for a bank that doesn’t make you pay monthly maintenance fees and, if needed, one that doesn’t require a minimum deposit. Keep an eye out for signup bonuses too, as some offer an extra $200 or $300 for agreeing to keep your money there for a specified period of time. “These banks are thirsty for your money, and you can really take advantage of the perks.”

5. Set Multiple Goals

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It happens all the time: People set a big goal for how much money they ultimately want to save (e.g., $10K), get intimidated, and give up. That’s why Anat says it’s best to start small instead. “Think of a number that’s going to make you feel really good at first,” she says. “If it’s $400 as a way to stick it to the Federal Reserve with that statistic, get there first. That’s going to give you a motivational boost and [show] you can save.”

From there, take at least two to three months of paycheck cycles to get used to flexing your saving muscle. “It doesn’t matter how much you’re saving, as long as it’s the same amount every single time,” Anat says. Because then you get to see your own successful track record, that you were able to adjust your living expenses, and that this is something you can do.

Then, evaluate how long it would take you to reach your ultimate savings goal — which, generally speaking, can range from three to twelve months of living expenses — if you continued saving that amount. If the timeframe feels reasonable, continue business as usual. If you want to get there faster, up the ante.