5 ways to build your emergency fund
Monday, 22 February 2021
After almost a year of living through a pandemic and millions of Americans left jobless or with less reliable income, it's clear that an emergency savings fund is more important than ever.
Many experts recommend having three to six months' worth of expenses in savings, but only about 40 percent of Americans would be able to cover a $1,000 emergency expense with savings, according to a recent survey.
In the event of an unexpected expense or sudden income loss, people without emergency savings often must turn to loans and credit cards. But during the pandemic, fewer people have been able to access credit when they needed it. Federal Reserve figures show a 27 percent increase in rejection rates among applicants for consumer credit between February and October 2020. During difficult times, credit may not always be available, so it's crucial to focus on building an emergency fund.
If you're ready to boost your emergency savings, consider these five ways to make it happen.
Set aside a separate account as an emergency fund
You may be tempted to stash “emergency" savings into your regular savings or checking account. But if those accounts are also used for everyday spending or other priorities, you'll be more likely to use the savings for non-emergency needs. Instead, open a separate savings account that is only to be used for emergency savings — and commit to leaving the money alone except in true emergencies, such as the loss of a job, an unexpected health expense or a major home or car repair.
Send your stimulus check to savings
The federal government recently approved a $600 stimulus check for each American under a certain income limit. And there's a possibility that there will be another, even larger, stimulus check to come.
Unless you need your stimulus check to pay for necessities, don't spend it. Instead, add it to your emergency fund. It's an easy way to beef up your savings without any personal effort.
Set up an automatic contribution to savings each pay period
Of course, you can't rely on the government to completely fund your emergency account. And if you have to remember each week or month to manually make a deposit into the emergency fund, you may rarely actually do it. Instead, set up an automatic contribution into the account each week or pay period. Even if you start with a small amount, it will quickly add up if you set up automatic contributions and leave the account alone.
Use student loan deferrals as an opportunity to put more money in savings
In addition to stimulus checks, the federal government has also expanded student loan payment deferrals during the pandemic. Currently, federal student loan borrowers don't have to make any payments on their student loans until Sept. 31, 2021, and there's no extra interest accrued by taking this forbearance.
If you have a student loan, consider taking advantage of the deferment and socking away the money you'd be spending on student loan payments into your emergency fund. It's a unique opportunity to build savings without costing yourself any more money in the long run.
Use cash back and other credit card perks for needed purchases
If you use credit cards, use one that offers cash back and other rewards to pay for groceries, gas and other necessities. Take the money you save on essentials and deposit it into your emergency fund.
Building an emergency account probably has never been more important.
The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial consultant about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates.
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