Could you afford a $1,000 bill today if an emergency came up? Could you pay for it from your savings? Could you do it without impacting your monthly budget? Does this exercise leave you searching for your credit card? The fact is that study after study reports that more than half of Americans would struggle to come up with the money to cover a $1,000 bill without credit or loans, much less not putting themselves in a bind. This is particularly scary as the price of everything is on the rise, especially related to fixing anything that breaks. Car and home repairs costs have skyrocketed, not in just materials, but labor.
What about missing a paycheck? Layoffs in many sectors, like tech, are wrecking the lives of those that once had dream careers. Time to get a new job seems to be stretching to new limits. I had a coworker remind me of the old adage of “expect a month for every $10,000 you make.” While I think that this is an exaggeration. You mean a $60,000 salary job takes 6 months to replace? Well, when laid off or to find a job that you may actually enjoy, it may be proving a rule. At least it is a good place to start and something to conservatively plan for.
Every financial advisor is itching to bring up emergency funds here. That savings accounts for the unexpected things that come up. Normally it comes with a recommendation of 3 to 12 months of expenses set aside for these unplanned expenses or loss of income. You should absolutely have an emergency fund, but that implies that you build it and sit on it. Set what you want, put it in an account and let it sit. I think this is earmarking that fund incorrectly though. Yes, it can be used for emergencies, yes you should have a few months of expenses set aside for longer term challenges, but this fund is not for emergencies, this fund is for freedom.
Yes, freedom. Emergencies and unexpected bills will come, but how much are you actually investing in your freedom? What are the things that make you feel trapped and how much do you do out of sheer obligation? Having that little (or a lot) of security set aside does something to your brain. Something primal. It gives you control.
Here are 4 ways that having a healthy savings account can impact your life.
Better Decision Making In Crisis
The first thing that having a freedom fund did for me, though obvious, was it alleviated a ton of stress. I grew up very poor. We never had an emergency fund. What that taught me was to be vigilant to avoid any major financial pitfalls and always have a plan. When disaster struck, life became a shell game of moving funds, bills, loans, and favors to get through this crisis. It was a lot of stress and a lot of work. So much so that I would find myself lying awake thinking of how I could get out of the potential scrapes looming on the horizon. That level of stress does not lend towards sound or long term decision making. It activates survival mode at every level because every bad thing that could happen to you seems on the table, loss of home and starvation somehow seem imminent if not dealt with. All of a sudden, with a little money set aside, I knew I could weather things as they came up. It helped me mitigate issues and make better decisions in emergencies, because as my emergency fund grew, the normal emergencies got smaller in comparison. I could think and act reasonably. Having that peace of mind not only alleviated stress, but it added clarity.
Boosted Confidence
People do a lot of silly things to show status or feign confidence. Flashy things, bad habits, toxic relationships, but they are too often tied to low confidence. While low confidence can be caused by an infinite number of things, but one that is generally universal is a lack of security. We need people and distractions if life isn’t going as well as we hoped and planned. If we can trigger envy in others, or at least the attention, it is something that makes us feel like things are or will be ok. Bad habits can distract us by making us feel better, or at least less discomfort. Having money set aside will not cure all your social anxieties, but it does remove one major one and that is the feeling that you are not secure in your finances.
Knowing that all your bills are paid, and that complete financial ruin will be a difficult thing for the world to inflict on you wears better than designer jeans. This is one factor in the “I don’t need anyone” mindset. You do need people though, but you need them for all the non-material reasons. You need to be a value add to your community and having your finances in order helps you be present and able to contribute as you and not a walking charity case. You can share your experiences with building some buffer against the elements of life. Afterall, if you found out how to grow a reasonable amount of savings, you are already doing better than half the population. You can share that humbly and inspire others. You may only have $20,000 in savings, but you will feel like a million Bucks.
Increased Wages
When you have a safety net, you lose a bit of fear. People put up with a lot of stuff to keep their job. All that stuff that they simply put up with like poor management, crossed boundaries, unsafe practices, even harassment wears away at us. It stunts our growth by demoralizing us and restricting us bringing our best selves to the work that we do. This makes work feel meaningless. Having to keep that job and keep quiet makes it hard to ward off the thoughts that you deserve or could have something better. Worse, it keeps us from making things better for others so we all suffer in silence.
When you can confidently say “I want this job, but I don’t need this job,” you are taking your career from passive to active. You are acknowledging your worth and dedication to your work. That is what gets promotions in many cases; not overtime, saying “yes,” or even being the best at the job, but a dedication to wanting to be there, do a good job, and seek constant improvement. It is actually caring that makes good managers and employees. When you find that you are comfortable speaking up and taking some risks at work, they pay off. It can pay off by improving your situation or helping you realize you are not in a good fit and allow you to proceed with confidence.
Furthermore, having some buffer enables risks like conscious career changes. Massive changes normally come with a reduction in pay as your experience in a specific area takes a hit. These hopefully are temporary, but either way, having funds set aside can help that transition. 3 months of expenses saved up can easily be a year closing the gap of the pay cut while you adjust or are just ramping up.
Saying no is often as important as saying yes. Having some buffer in your finances enables you to do both.
Introduction Into Passive Income
Your emergency fund should grow. It is money that will sit in one place and you may even forget it exists. While the purpose of this account is not to grow, it doesn’t have to lose value. You know how they say “all investment comes with the risk of loss?” that is why you don’t keep your emergency fund in stocks or other investments. This needs to be liquid.
There are tons of high-yield savings accounts out there (this isn’t sponsored so I will let you google search it) that offer 3–5% annual return on your money. That is below stock market returns, I know, but if you are throwing money into your standard savings account, you are looking at less than 1% which may be eaten up by fees (please research your banking options). With a high yield savings account, you see your money grow, maybe for the first time. Compound interest is real. An account with $25,000 in it will likely grow by more than $1,000 over the course of a year, it is not life changing, but an awful nice indicator that you are doing the right thing. This money is taxable of course because it is income. Passive income. Money made from just being in the account. It takes some volume to show this, but it is definitely a positive side effect to having money set aside.
How To Start and Manage Your Emergency Fund
Ok. So you are ready to start saving, but need the first steps? Start by getting your high-yield savings account. Make sure you can link it to your current checking account to allow for transfers. Ensuring compatibility with your banking network is key.
Step 1 — Set your goal.
How much you need is a personal decision. 3 to 6 months of expenses is the general rule of thumb and over 12 months expenses is too much to be idle. Whatever amount you choose, pause other saving, investing, large purchases, and excess spending until you hit it. This does 2 things: 1) It saves money. 2) It is training you how to budget for saving.
Step 2 — Regulate your Savings
You can dial back the savings, but keep a regular amount transferring into this account on every pay cycle. $50 or $500, doesn’t matter as much, but you want this account always growing.
Some high-yield savings accounts require direct deposit. This may sound like a deterrent but is actually a benefit! You can set your paycheck to go directly into your high-yield savings account then schedule your weekly or monthly expenses to transfer into your checking account. Since your checking account is where all your spending happens, you can standardize how much money you are getting to spend that month and save the rest. This boosts your savings rate since if you have months with that extra paycheck or bonuses, they are already saved, reducing the likelihood of splurging with the extra cash.
Step 3 — Know what you are doing with Spillover
So you maxed out your emergency fund. From the goal you set. Set up a place where you can invest your excess savings. For example, if your account hits the $25,000 goal you set, but you have $25,100: invest it! Many banks with high yield savings options will have options to invest. Move that extra $1,000 into a simple index fund like the S&P 500. This money has some risk attached to it, but stands to grow at a higher rate. Do not wait until the market is low or high, just invest regularly. Monthly is normally safe.
Keep this spillover separate from retirement funds etc. This is operational investing, so if you need more than your emergency fund, this is money you can call on if something comes up more than your emergency fund or if you want to make that big purchase. This is perfect for saving for a car or down payment on a house.
Step 4 — Keep it separate and forget it.
The best way to save is to automate it. You probably lose tons of subscriptions every year now and never notice. Do this with your savings. Set it up to automatically withdraw an amount from your checking account around when you get paid.
Don’t look at this account more than once per month if even then. This is for emergencies. You should focus on keeping your checking account balanced and not needing this money. You should not buy anything you “want” with this money and if it ever dips back below the minimum amount you set, you need to go back to step 1. The best way is to pretend it doesn’t exist.
If you have ever seen a fire alarm with “break glass in case of emergency” this is the same way. Breaking glass takes action, it makes a mess, and it has to be repaired. If you don’t have to break the glass, don’t break the glass.
The impact of having a healthy savings account spans much farther than your finances, but adds many more economical and psychological benefits. I struggle with the statistic that only half of Americans have any savings. I would love to hear your experience with starting your savings journey and the impacts it has had in your life!