Living paycheck to paycheck? Here’s how to create an emergency fund.

A few of our classes include reaching financial goals, budgeting or saving. These classes all touch on having an emergency reserve. Recently in the news, it has been reported that 78% of households in the US live paycheck to paycheck. This means no retirement investments, no savings accounts and no emergency reserve. 

It has been reported that 78% of households in the US live paycheck to paycheck.

An emergency fund is just that – a rainy day account for when the income is insufficient for your needs while you are working. It could be for unexpectedly buying new tires, to get your child medical treatment, to cover your expenses while been on a work furlough; any number of things. It is also so you do not have to use credit and be in the difficult position of having to pay high interest on a credit card in the future. Think of it as an insurance policy. 

It will take a number of steps and some time to build up your reserve. First, know approximately your monthly essential expenses. Examples would be housing, food, insurance, utilities and transportation. This is only necessities. Next, have a bank account or a place to stash three to six months worth of money for these necessities. You want to have it in a safe place. The money should be there for you to access immediately when you need it. 

Now comes the hard part – filling the account with the requisite amount of money. It may take you a year or more to save this amount. It can be a slow process but watching it grow is very satisfying. Think of it as a bucket of water that you are filling drip by drip. When the bucket (account) is full, you no longer need to add to it. If you pull out some water (money), you should refill it so that it is full for when you next need it. 

We suggest three months worth of essential expenses if you are in a dual income household, six months in a single household.

Why so much or why such a big bucket? We suggest three months worth of essential expenses if you are in a dual income household, six months in a single household. It is a lot of money, but past economic cycles have shown us that it can take a while to get another job and there is no guarantee that a new job will pay as well as your last position. 

Saving has no magic wand. It is a slow process that requires patience but it will “pay off!”