September 8th, 2021 | Updated on March 16th, 2022
One of the lessons many of us learned in recent months — some the hard way — was the wisdom of having an emergency savings fund.
Once businesses began shutting down in response to Covid-19, millions were left without a source of income for an indefinite period of time.
That’s a scary situation for anyone to face, but even more so in the absence of any sort of emergency financial cushion.
While we all hope to never again face anything as disorienting as the past 18 months, the time is now to begin preparing for a future financial crisis.
An emergency fund should help cover important expenses such as your home mortgage and utilities as well as provide cash for essentials such as groceries.
A fund such as this definitely comes in handy during a natural disaster or the unexpected loss of a job.
Perhaps even more valuable than keeping bills paid is the relative peace of mind it offers. It’s nice to have a little breathing room to look for work elsewhere without a panic-stricken look on your face.
While there’s no surefire get-rich-quick scheme for building up your emergency fund, there are some proven methods you can use to speed up the process a little.
Add these five tips to your everyday financial planning to boost your emergency fund before a desperate need arises.
1. Pay Yourself First
The phrase “pay yourself first” is heard frequently in savings and investment circles, with good reason. The underlying idea is to automatically move money into your savings account and investments before spending it on anything else.
This practice ensures that saving and investing are made a priority and that available funds aren’t lost to frivolous spending.
One simple yet effective way to make sure you’re paying yourself first is to set up automated transfers. Select the frequency — monthly, weekly, etc. — at which you’d like to have money funneled from checking to savings.
You’re less likely to spend money that has automatically been squirreled away before you get your hands on it.
Nowadays, you can even choose a debit card that will help you build up your savings account. It does this by rounding up all of your purchases and transferring that difference to savings.
However you do it, tell your extra money where to go lest leaving it in checking tempts you to buy that shiny new plaything.
2. Just Make Your Minimum Debt Payments…For Now.
It may sound counterintuitive, but one strategy for building up an emergency fund is to stop sending extra cash to pay off debts.
Paying down interest-bearing debts is a good practice, but only after your emergency savings are fully funded. For now, just stay current on your minimum payments.
While paying interest on a loan is one of the worst ways to spend your money, it’s also a necessity for many people.
The point is not to ignore tackling your loans and pay them off — we’ll get there in Step 5. Rather, it’s to stuff every spare cent you have into an emergency fund that you hope you’ll never need.
Plan on putting the brakes on aggressive loan repayment until you have at least three months of generous operating expenses in savings. Sock away whatever amount of liquid assets you’ll need to feel safe in the event of unanticipated job loss.
3. Go On A Spending Fast.
Intermittent fasting has been shown to help with physical cleansing and weight loss. You can employ a similar technique with your monthly budget.
Going on a “spending fast” can stop you from spending money on certain luxuries. The money you save during this time can be added to your emergency savings until that account has reached a predetermined comfort level.
Let’s say you’re a huge coffee drinker. If your routine includes a premium cup of coffee every morning, you might be spending “just” $5 a day on it. However, that money will quickly add up over the course of a month.
Taking away that expense, plus a few others, will be a temporary sacrifice that can give your emergency savings a significant boost.
You don’t have to deprive yourself of everything you enjoy to go on a spending fast. For example, you can brew coffee at home to get your caffeine fix while still cutting down expenses.
Carpooling, cooking for yourself, and becoming more energy efficient are other options to consider both now and as cost-cutting measures in the future.
4. Sock Away Income Tax Refunds And All Other Incentive Payments.
Most of us won’t just stumble into a large sum of money. Lottery odds aren’t in your favor, after all. However, you can take advantage of an annual income tax refund — if any — by diverting it toward your emergency fund. You can do the same with any childcare credits or federal stimulus funds.
Many people make an annual tradition of spending their tax refunds on luxuries as a reward for a year of hard work.
As fun as that can be, it’s not the soundest financial plan. Your tax refund can quickly replenish your emergency savings if you were forced to tap into them recently.
Of course, you don’t need to put your entire tax refund into savings. Use some of it to pay bills or treat yourself to a nice dinner.
Just balance that against the benefit of having a single large boost to your emergency savings fund. Apply this practice to any sudden cash you might run into, even birthday money.
5. Eliminate Your Debts, Smallest To Largest.
As mentioned above, paying off debt shouldn’t take precedence over building up your emergency fund. Once you’ve done that, paying down debt will give you the financial freedom you need to save more.
Your first step is to not take on any more debt. The next is to formulate (and stick to) a debt payment plan.
The faster you can pay off your debt, the less interest you’ll have to pay, and the sooner you can go all-in on your other financial plans. This includes making sure your emergency fund stays where you want it to be.
Start with your smallest loan and go after that one first. When it’s paid off, go after the next one in line. As you pay off the smaller debts, you’ll have more available cash to tackle the larger ones.
Once you get your emergency fund to an acceptable level, you can set your sights on other financial goals. Just prioritize saving for emergencies first so you never find yourself in a position where you need ready money but don’t have it.