For most of us, an emergency fund is something we chalk up to “building later, when I have more money.” And, while the need to keep your bills paid and to pay down debt as quickly as possible is certainly understandable, one of the fastest ways to find yourself mired in new debt is to be hit with an emergency that you are not prepared to cover. Financial emergencies like medical bills, car repairs, and the like are rarely cheap.
In addition to the actual money you’re saving when you build an emergency fund, you are also building something much less tangible: peace of mind. When the financially unprepared are hit with an expensive emergency, they tend to panic and reach out for whatever funding they can find, hang the cost and the terms and the consequences.
According to Max Lend, a company that specializes in online installment loans, many of the payday loan lenders out there are “debt traps” meaning that, because of shady schedules and wicked high-interest rates, you’ll often end up trapped in a cycle of taking out a payday loan to pay off a payday loan. This is why alternatives like installment loans, if you need them, are the better option if you’ve exhausted your other financial options.
Of course, prevention is the best form of preparation so let’s talk about different things that you can do to help build an emergency fund.
There are two basic approaches to an emergency fund. One is to save as much as you can afford from your paycheck each payday. The other is to find a way to earn more money and put your earnings from that into your emergency fund. They both have their advantages and disadvantages.
Saving As Much As Possible
Perhaps the hardest thing about saving money is remembering not just to make the transfer from your checking to your savings account but to keep your hands off of that account so that it has time to grow. And, if you’re already strapped for cash, finding the room to save even 5% of your paycheck can feel like a huge burden.
One of the best ways to circumvent these issues is to use direct deposit. Set up your direct deposit so that a portion of every paycheck gets deposited directly into your savings account. This way it will feel more like you never had that money to spend in the first place and takes away the pressure to put off making the transfer. It also adds incentive to go over your budget and look for ways to save on your current spending, like shopping at thrift shops instead of department stores, buying generic instead of name brand, cutting Hulu and Netflix, etc.
If this feels like too much of a burden (and you won’t get any judgment from us if it is, we’ve all been there before), consider an escalating savings method. This is where you start saving manually with a very small amount, like a dollar. Then you double that the next week to two dollars, four the next and so on. This gets you in the habit of spending and gives you time to redo your budget and look for other ways to save.
Earning More Money
Perhaps the easiest way to do this is to offer to be the go-to overtime person at your current job. This saves you from having to hunt down a second job or side gig and goes a long way toward building respect with your employer.
If there is no overtime to be had, or if it is very sporadic, you might try finding a side gig. There are plenty of them out there that really do work around your existing schedule. Driving for Lyft or Postmates, for example, lets you sign in and out whenever you want or need to work. As you search for these gigs, though, be careful: there are a lot of scams out there that will promise you easy money but are often pay-for-play operations (never pay to work) or that pay such tiny sums for the amount of work required that they really aren’t worth it. There are quite a few really great articles about good side gigs. Read through a few of them to get some ideas.
What matters most is that you get into the habit of saving now, before you have to. It’s much easier to set up a savings plan now, while you’re calm and in planning mode than it is to find a large sum of cash when you are panicked and pressed for time. We promise!