Before you pay off debt, before you plan a trip, before you start working toward your goals, before you buy your next pair of shoes, you must have a savings account with some money in it. Period.
A savings account (or an emergency fund) is basically insurance against life, because life is going to happen. Your car is going to break down. Your hot water heater is going to bust all over your garage. Your best friend will have an emergency and need you to bail them out of jail. (Okay, hopefully not that one.)
Where Should I Keep My Emergency Fund?
Your emergency fund should be in cash, not in stocks or bonds or anything else you can’t get to easily.
Get a savings account with limited access. My savings account is at a different bank from all my other money. I purposely don’t even have a debit or ATM card for it, so that I cannot get to it on an impulse. If I can access it and withdraw $20 at a time, I will do stupid things with it. Because I know this about myself, I have limited my own access.
If you don’t have a ton of money to start with, find an account with no fee for falling below a minimum. Bank fees are completely absurd; never pay bank fees. Suckers pay bank fees, and you are not a sucker.
How Much Should I Have In My Emergency Fund?
The popular number is $1,000. That is what most people recommend because it is an achievable number and not too intimidating.
But I want you to sleep at night, and with housing costs soaring, $1,000 is not enough. Most people reading this are not be able to keep a roof over their heads for a month with $1,000 and no job.
In my book Singles: Take Control of Your Own Financial Journey I walk you through how to figure out a good number for your emergency fund. But if you don’t want to grab that just estimate how much cash you need to survive for a month. I want that to be your first goal for your savings account.
Don’t freak out. You can do it.
If you don’t have anything in savings, you are not alone. In 2016, 63% of Americans did not have enough in savings for a $500 emergency. In November 2015, a survey found that one in three American families had no savings at all (cited here). Don’t worry, you can easily move into that other 37% by making a few changes.
If you would like to earn more on your savings check out How To Find Savings Accounts That Pay More Money!
How Much Should You Have in Your Savings Account?
If you don’t have debt, your goal should be six months of living expenses. Make sure they are living expenses and not happy hour cash, season tickets to a local sports team, and pizza delivery three nights a week. If you end up having to use your emergency fund, you will need to make some lifestyle adjustments until you get back on your feet.
That Number is Huge! How Do I Do It?
Pay the minimum on your debt until you get that amount in your emergency fund. This fund is your number one priority for money you do not need to pay basic bills. I don’t care how high the interest rate is or how close you are to paying off a debt; get your emergency fund filled first.
Designate money in your budget just for savings. Chapter 12 in my book walks you through this if you want some help. Pay your savings account at the beginning of the pay period when you pay your other bills and don’t touch it. If possible, set up an automated transfer so that you save money without thinking about it.
Until you get this money into your emergency fund, cut all extra spending. Watch your friends eat when you go out. Don’t splurge on items that aren’t needed. This is your top priority. Once you have an emergency fund, you can add those items back in. I recognize how important they are to singles, but this is more important. And if what you are making right now isn’t enough, work on increasing your income.
Once you get your emergency fund completed, you can start paying off your debt, and sleep better at night.