Here we are again, and it’s time to talk about how to recession-proof your finances with some action steps you can take right away. This week we will talk about creating and maintaining an emergency fund and living within your means.
Creating & Maintaining an Emergency Fund
Let’s start with the obvious. If you have plenty of cash lying around in a high-interest, FDIC-insured account, not only will your money retain its full value in times of market turmoil, but it also will be extremely liquid, giving you easy access to funds if you lose your job or are forced to take a pay cut.
And now for the subliminally obvious. If you have your own cash, you will be less dependent on borrowing to cover unexpected costs or the loss of a job. Credit availability tends to dry up quickly when a recession hits. Once these things happen, use your emergency fund to cover necessary expenses, but keep your budget tight on discretionary spending in favor of making that emergency fund last and restoring it ASAP.
So, what is the best way to set up an emergency fund if you don’t have one? There are a few really good ways to break what can feel like a monumental task into smaller, easier-to-achieve actions. For example, one way to set yourself up for success from the start is to shoot for one month or two weeks work of expenses saved rather than shooting for three months’ worth of expenses right away. Whatever it takes to make your first goal seem doable.
Reaching that first goal can give you the motivation to keep going.
From there, you can set your second goal higher — and the third even higher. By then, saving will have become a habit, and the positive motivation you’re building by reaching the smaller goals will help propel you toward larger ones. Of course, having emergency savings set up before a recession hits is the best way to protect yourself, so if you don’t have one: GET GOING!
One of the best ways to get started is to start small and automate your savings. Set your initial contribution level at a relatively small amount. That will ensure you don’t stress your cash flow, making it too easy for you to rationalize abandoning your savings routine.
Find something in your life you can live without or with less — trim back the monthly coffee habit a bit. Pass on that new pair of shoes or one big night out. Choose that amount — whether it’s $5 or $100 — and commit to saving it at regular intervals: per month, per week, or per paycheck. The key is that it needs to become a habit, not a recurring struggle.
Out of sight, out of mind: the easiest way to save money is never to touch it in the first place. Most employers provide direct deposit, and some will even deposit to more than one account. Set up a separate account just for your emergency fund and have your chosen contribution amount deposited automatically, either by your employer or your bank. Use a savings or other type of account that you can’t access easily, unlike a checking account. Chances are you won’t miss it. And don’t watch the account balance continually — that will only make growth seem smaller and slower. Forget about it and let time do its thing.
Once saving has become automatic, don’t be lulled into a false sense of financial security and let spending creep up again. For example, if you give up a new pair of shoes every month only to replace them a couple of months later with a new monthly shopping habit, you’re not saving at all!
If you still have an extra $50 left over each month, maybe your savings deposit amount is too low. If you don’t have an extra $50, you may be running up a credit card balance. Neither is productive. You shouldn’t stop enjoying life while you build your emergency fund, but you shouldn’t lose sight of its importance, either.
Having an adequate emergency fund is critical to your financial well-being. Be realistic but try to reach your ultimate savings goal as fast as you can. That alone might make life more enjoyable.
Living Within Your Means
The second part of creating and maintaining an emergency fund is actually our second action step, living within your means. Why? Because, let’s face it, if you overspend regularly and you have an emergency fund, you’ll constantly be tempted to dip into that emergency fund to correct your overspending mistakes. And what happens then? No emergency fund when an emergency hits!
So, if you make it a habit to live within your means each and every day during the good times, you are less likely to go into debt at times like these when gas and food prices are high and more likely to adjust your spending in other areas to compensate. Debt begets more debt when you can’t pay it off right away—if you think gas prices are high, wait until you’re paying a 29.99% APR on them by fueling up on a credit card. BAD IDEA!
Now, let’s take this principle to the next level; if you have a spouse and are both still working, see how close you can get to living off of only one spouse’s income. In good times, this tactic will allow you to save incredible amounts of money—how quickly could you pay off your mortgage, or how much earlier could you retire if you had an extra $40,000+ a year to save?
In bad times, if one spouse gets laid off, you’ll be OK because you’ll already be used to living on one income. Adding to your savings will stop temporarily, but your day-to-day frugal spending lifestyle can continue as normal.
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
1 Investopedia. 7 Ways to Recession-Proof Your Life.
2 Securian. Steps to Building an Emergency Fund.
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