No one likes unexpected expenses and bills. But if you don't have sufficient savings, you could find yourself without many options when something goes wrong. You need an emergency fund, and the goal is to save at least six months' worth of expenses, the amount most financial experts recommend. Let's look at some ways to build a six-month emergency fund faster.
1. Make a list of all expenses
The first step in building an emergency fund is to list your monthly expenses. This will allow you to see how much money you spend each month and give you an idea of what you need to save for your emergency fund. Here's how:
• List all your fixed expenses (expenses that don't change from month to month). These typically include rent/mortgage, car payments, student loans, cable bills, etc. These should be listed as the amount due each month.
- List all your variable expenses (expenses that vary from month to month). These typically include groceries, gas, entertainment, and eating out. A monthly average will help: total up the last three months of spending on these items and divide by three to get your monthly total.
- Add your fixed and variable expenses together to get a monthly total.
- Multiply by six to determine how much money you need in your six-month emergency account.
2. Know where your money is going
To save six months' worth of expenses, you first have to know where your money is going. Start by looking at every transaction that comes out of your account. It can be helpful to use a budgeting tool or app to make this job more manageable.
Are you surprised about where you're money is going? Is what you're spending on bringing any value? It's your money -- make sure it's going where you want it to go!
3. Take stock of your income streams
This sounds simple, and it is -- to a point. You might think you're aware of your financial situation, but if you're like many Americans, there are other income streams that you need to consider.
An "income stream" is any source of money that flows into your account regularly, whether weekly, monthly or every few months. It includes funds from the salary you (and/or your spouse) earn, dividends earned on investments, etc. The first step is to figure out how much money flows through your accounts regularly. Make a list of all your income streams and write down the average amount received from each one every month.
Don't just consider what comes in from one source: Your income stream totals should also include variable sources of income (like bonuses or commissions), side hustles (your Etsy shop or blog), passive income (investment dividends), and even gifts from family members -- nothing is off-limits. It's essential to get an accurate picture of how much money flows in, so you know how much can be allocated toward an emergency fund each month.
4. Adjust your lifestyle accordingly
To build an emergency fund, you may need to change your spending habits to save more money. Look at your bank statements from the past month, and identify how much you've spent on necessities such as rent/mortgage, utilities, etc. Next, see how much you've spent on discretionary items like eating out or entertainment, and compare that to how much money you have left each month after paying off all bills.
Secondly, get rid of unnecessary expenses. Go through each bill in a given month and look for extra fees or subscriptions that you don't use or have forgotten about. You might be surprised at how many useless expenses take up space in your financial life. Once they are gone, you won't miss them, and you'll have more money available every month to put in an emergency account.
5. Reduce unnecessary spending
Cut back on discretionary spending. To build an emergency fund quickly, cutting down on discretionary spending may be necessary until you reach your goal. "Discretionary spending" is the portion of income left over after necessities -- like housing costs and food -- have been paid for. This category can include everything from vacations to take-out lunches at work. This area can suck up lots of extra cash without you being aware of it.
How much money are you spending on food? Save money on groceries by making lists before shopping, and stick to it by buying what's on the list. Other tips:
- Buy in bulk where possible
- Choose store brands over name brands
- Buy generic medications instead of brand-name ones
- Bring reusable bags when shopping
- Shop with coupons or rewards cards when available but don't use them to buy junk food
- Refrain from grocery shopping while hungry (to avoid impulse purchases)
- Cook meals at home so as not to eat out as often.
- Take advantage of deals on perishable goods that are about to spoil--like bakery bread or produce -- and freeze them for later use.
- Make coffee at home in the morning instead of stopping at a cafe on the way to work each day.
- Skip luxury foods, even if they are on sale.
6. Find ways to maximize your income
If you're struggling to save up an emergency fund, make sure you're taking full advantage of all the extra income.
Ask for a raise. If you have been at your job for a while, it never hurts to ask for more money, and this is one of the easiest ways to increase your monthly income. Be prepared with facts about how much you have accomplished since your last raise and how much money someone else in your position makes.
Get a second job or side gig. Getting another job might sound like the last thing you want to do if you already work full-time. However, it's surprisingly easy nowadays, thanks to apps and websites like Lyft, Uber Eats, and Instacart. These on-demand services will pay you cash in exchange for driving people around town or delivering groceries and food from restaurants directly to their doorsteps.
7. Take advantage of employer benefits
One of the best ways to save money is to take advantage of your employer's benefits. Many companies provide retirement plans, health insurance, and life or disability insurance, and other employers offer perks, such as tuition reimbursement or childcare benefits. You can also ask your company if they have a 401(k) match program, which will allow you to essentially double your savings by contributing part of your paycheck into a 401(k) retirement plan and having your employer contribute.
Start by looking through all the benefits available to you at work and estimate how much money these benefits are worth each year. Having more will increase the amount of money you have available and make building a six-month emergency fund easier.
The Bottom Line
Having a six-month emergency fund means added peace of mind. Hopefully, you'll never need it, but it's good to know it's there should the unexpected happen.