I’ve written and spoken about this issue before, but it bears repeating because this truly is a national crisis: The single worst money mistake you can make is to fail to maintain a cash cushion for emergencies. And, unfortunately, almost half of Americans today have fallen into this mistake. (As The Atlantic pointed out recently, 47% of Americans would not be able to cover an unexpected $400 expense without borrowing or selling something.) This is an incredibly precarious and stressful situation to be in. Eventually, an event like a job layoff or a medical emergency will happen to most of us. Without an emergency fund, this can trigger debt that gradually spirals out of control.
- It’s only a matter of time before everyone is faced with an emergency expense.
- If you assume friends or family will be able to help you when an emergency arises, you may be unpleasantly surprised when the time comes.
- No matter how small or large your income, you need an emergency fund.
Give yourself the security that comes from knowing unexpected expenses will not derail you. Start now.
- Increase your monthly savings and deposit as much of that as possible into an easily accessible savings account until it reaches about six months’ worth of expenses.
- After that, build up another 18-24 months of cushion to weather more serious emergencies.
If you’re not sure where or how to cut back on expenses in order to increase your savings, try this exercise: take a “No Spend Month.” Eliminate all non-essential spending for a month. The simple act of sorting your expenses into “wants” vs. “needs” for one month can be eye-opening and liberating. You’ll find it easier to sacrifice luxuries like expensive dinners or a vacation when you understand what you stand to gain: security and peace of mind.