Emergency savings can help you out if unexpected expenses arise. But the coronavirus pandemic has caused the majority of Americans to dip into their rainy day funds, with many expected to deplete them by the end of 2020.
Roughly three in five Americans (61%) say their emergency savings won’t last through the end of the year or that they have already run out of savings, according to the September installment of Clever’s COVID-19 Financial Impact Series. That’s an alarming number, especially since only 18.1% of Americans say they won’t run out of emergency savings.
If you find yourself with diminishing emergency funds or have already depleted your savings, it’s important to take action now to rebuild your fund. By saving sooner, you can make your financial future more secure.
How to reduce expenses and build an emergency fund
Reducing expenses is key to building an emergency fund, but the first step is deciding what amount of money you can reasonably afford to save every month.
Experts typically recommend you have an emergency fund with about three to six months worth of your living expenses. But amid times of financial hardship, like the coronavirus, that threshold may be out of reach for people living paycheck to paycheck.
If your income has decreased, you likely won’t be able to save a lot of money — especially if you have outstanding loan or credit card balances. Some experts suggest you adjust the amount you save based on your current income. So if your income dropped by 30%, reduce your monthly savings by 30%.And if you have debt, some experts recommend you save a minimum amount around $500 or $1,000 before paying off debts so you have some savings.
Keep your emergency funds ina relatively accessible account, such as a high-yield savings account. Accounts like Marcus by Goldman Sachs High Yield Online Savings and Ally Online Savings Account both currently offer a 0.60% APY, which is 12 times the national 0.05% average.
To increase the amount of money you can put toward an emergency fund, review your bank statements and identify areas where you can cut costs. Here are some helpful tips.
Create a budget
Creating a budget can help you track the amount of money you bring in each month and how much you spend. While the task may seem daunting, the work you put in can help you understand your spending habits and reduce expenses.
Steps to create a budget include calculating how much you earn each month, listing monthly expenses, labeling fixed and variable expenses, determining the average cost for each and tweaking your budget as your income and spending change.
Once you create a budget, you can assess whether there’s wiggle room to cut costs. First tackle unfixed costs, like streaming and music subscriptions, since you can live without these. If you subscribe to multiple services, you may want to consider canceling ones you use infrequently or downgrading to a lower-tier level.
Next, reassess some fixed costs, like auto insurance and phone plans. You can shop around online for new quotes and see if you get a better deal elsewhere. Another option is to call your provider and negotiate a lower price.
You can save money at the grocery store by using a grocery rewards card, like the Blue Cash Preferred® Card from American Express (6% cash back at U.S. supermarkets on up to $6,000 per year in purchases, then 1%). You can even pair that with a grocery rebate app, such as Ibotta, that gives you cash back for buying groceries.
Consider new ways to make money
Beyond cutting costs, consider any monetizable skills you have. If you’re artsy, you may want to consider making items that can be sold on Etsy. If you’re good with kids, you can take up babysitting during the evenings or weekends. Other side hustles include tutoring and even walking dogs. You can list your services on social media or through sites like TaskRabbit and Care.com. The extra money you bring in can be put toward your emergency savings.
Taking a look at your finances and finding ways to reduce costs can help you find areas to save for an emergency. The sooner you start saving, the more money you’ll have in the long run for any unexpected expenses that may arise. Just remember nothing happens overnight — you’ll need to stick to your budget and be creative with it to build your emergency fund.