How to not be one of the many Americans without $400 in savings
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Although we always hear about the importance of saving money for the future, the notion of saving separately for an emergency fund isn’t always as widely discussed or kept top of mind. In fact, a recent survey by the Federal Reserve Board found that 32% percent of Americans cannot cover a $400 emergency expense. Instead, they’re forced to put the expense on a credit card, borrow it from family or friends, or not pay it at all.
Whether it’s financial hardship, the rising cost of living, or a focus on paying off debt, there are undoubtedly a wide variety of reasons why so many Americans can’t cover a $400 emergency expense. But, the importance of having some extra cash on hand for when life throws unexpected curveballs your way should not be underestimated.
Here, we’ll delve into the importance of an emergency fund for long term financial protection, as well as provide some tips for how to get there bit by bit if you’re just getting started.
Why do I need an emergency fund?
Life can change in the blink of an eye, which is why it’s important to prepare for emergencies that can upend your financial stability. Whether it’s an accident or illness, an unanticipated home repair, or the sudden loss of your job, having an emergency fund ready to go can help you avoid a devastating blow to your cash flow.
An emergency fund is just that—a way to prepare for emergency expenses that appear out of thin air. Emergency funds exist to help keep your financial health in good standing and reduce stress about things that are often out of your control.
No matter what stage of life you’re in, it’s smart to have an emergency fund to protect your economic well being. This is especially true if you live on one income, you’re self-employed, or you're saving for a separate financial goal.
Not to mention, emergency funds are important if you're trying to pay off debts or loans, as they can help you avoid having to dip into your repayment money or go further into debt to provide relief in an emergency situation.
How much should I save for an emergency fund?
The old proverb “better something than nothing at all” holds true here. You’re not alone if you’re starting from scratch—as we said before, many Americans would struggle to pay an unexpected expense as little as $400.
If you’re just getting started, $400 is a good first goal. If you’re already in the habit of saving, it’s generally recommended that you aim for enough to cover at least 3 to 6 months’ worth of expenses. Remember, your expenses are how much you’d need to pay your bills each month, not an exact match of your paycheck.
Although 3 to 6 months’ worth of expenses is a good goal, it's not always realistic for everyone. Another way to determine how much you need in your emergency fund is to determine the bare essentials in terms of living expenses. This includes things like food on the table, utilities paid, rent or mortgage covered, transportation, and debt payments.
Eventually saving this much can help guarantee that if you unexpectedly lose your job or source of income, you'll be able to keep yourself and your family afloat until you find a new position. These savings can also help curb the stress that often coincides with unexpected life changes or expenses.
How can I save for an emergency fund?
Saving money for an emergency fund doesn’t have to be as intimidating as you think. If you’re just getting the ball rolling, it’s ok to start small. Even if you can only afford to put aside $10 to $20 per month, the fund will slowly start to grow, and you’ll also be building the necessary financial habits that can lay the groundwork for future goals.
Your emergency fund should be easily accessible and available to you upon notice. But, it should also be separated from other accounts you use regularly so you can protect your money from everyday expenses. A good way to start is by setting up an automatic transfer from your checking account into a high-interest savings account that is purely there for emergencies.
If you want to reach your savings goals faster, the Varo Savings Account offers a high annual percentage yield (APY), no fees, and easy auto-saving tools to help you grow your money. It includes Save Your Pay, which automatically deposits a percentage of what you earn into your Varo Savings Account. The percentage you want to save is up to you.
Don't panic if you have to use this account before it's fully funded. It's there for when you need it most, and that shouldn't deter you from sticking with your longer term emergency savings goal and replenishing it when you can.
Even if you start with a goal of $400 and take it from there, it’s always a good feeling knowing that you’re at least partially covered for the unexpected expenses that life can throw your way. It’s an even better feeling knowing that as you grow your emergency fund over time, you’re actively taking some of the necessary steps to protect your financial health in the long run.
Unless otherwise noted above, opinions, advice, services, or other information or content expressed or contributed by customers or non-Varo contributors do not necessarily state or reflect those of Varo Bank, N.A. Member FDIC (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s) other than Varo.
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