Life can be unkind sometimes, especially when it comes to our finances. You could wake up in the middle of the night to a flood from a pipe bursting in your home, and suddenly you're on the hook for a costly cleanup and repair. Or you could be injured and rack up pricey medical bills, or go to work one day and find that you're being laid off through no fault of your own.
Any of these can hurt us financially, and without money in the bank, you may have no choice but to run up expensive credit card debt to deal with them. That's why having emergency savings is crucial -- yet only 38% of Americans have actually built up an emergency fund, according to Schwab's 2019 Modern Wealth Survey.
If you're without emergency savings, you should know that you might suffer some serious long-term repercussions the next time an unplanned bill pops up. Having to charge expenses on a credit card and pay that balance off over time means loads of interest. It also means potentially damaging your credit, thereby making it harder to borrow when you need to.
A better bet? Establish a true emergency fund with enough to cover a minimum of three months of essential living costs (and ideally, more like six months' worth). Here's how.
1. Choose a few expenses to cut back on
If you currently spend your entire paycheck month after month, then you'll need to make some changes to build emergency savings. Look at your budget (or create one if you don't follow one yet), see where your money is going, and identify some expenses you're willing to trim.
The specifics are up to you. If you'd rather not give up daily luxuries like store-bought coffee, takeout meals, and rideshares, then maybe downsize to a smaller apartment with lower rent. Or you might cancel your cable package, give up a gym membership, and take a staycation rather than your usual yearly overseas jaunt. It doesn't matter where you cut corners as long as you make a reasonable effort to save.
2. Get a second job
Sometimes, cutting back on expenses will only get you so far in building savings, especially if you lead a fairly modest lifestyle and spend the bulk of your money on basics. In that case, a second job could be your ticket to a solid emergency fund.
And you don't have to sign up for a boring gig, like fielding calls in a call center or entering data every evening. Instead, try to find a side job that excites you, or that you know you'll enjoy doing. You can design websites, photograph events, sell your homemade crafts, or care for other people's pets. You have plenty of choices for doing meaningful work on the side and padding your bank account in the process.
3. Bank any extra cash you come into
It's not uncommon to come into some extra money during the year, whether it's a bonus at work, a tax refund, or even a generous gift or inheritance. If you're without emergency savings, banking that money will really help to jump-start your savings efforts, and once your bank account starts looking more robust, it may serve as motivation to keep pushing toward your savings goal.
An emergency fund may not be something you can build overnight, but it should be your top financial priority. A healthy level of savings will give you peace of mind in the face of life's uncertainties; it's worth some sacrifices to get there.