• Parker Graham

4 Steps to Build an Emergency Fund You Probably Haven’t Heard Before

Have you heard about how the average American family cannot withstand a $400 hit to their budget? Yeah, so have we. Probably a million times.


Ok ok, we get it, we suck at saving money and we love having credit cards as our back up plan. As a nation, we are like mustard and jelly when it comes to using our own money versus other’s for life’s little missteps - grossly mismatched. But how do we fix it?


Building an emergency fund doesn't have to be complicated.


The short answer is simple; we need to save more. The long answer is a bit scarier; changing your behavior as a human is hard to do. Not impossible, but very hard.


Because of this, we need to break the status quo of most posts around this topic. Today we put together a list of the four steps to building your emergency fund that you probably haven't heard before, all while turning your human behavior into an asset as opposed to a liability (#financepun #getmoney).


Some might look familiar, or maybe you are completely new to the emergency fund game. Regardless, follow these steps and pretty soon your “rainy day fund” will be sheltering you during life’s next batch of financial storm clouds.


1. Open your Emergency Fund at a new bank


In our ever seamless world, it can sometimes feel great to have all of your money in one place. It harkens back to the days where people used their mattress as their family safe.


While keeping all of your money at one bank or credit union is sometimes a good idea, it is quite possibly the worst place to keep your emergency fund. Today’s technology makes it too easy for your emergency fund to slowly morph into your new shoe fund. Believe me, I’ve been there 🙋🏼‍♂️.


The trick to changing your financial behavior is to remove the ability for you to negatively impact it. This is why keeping your savings at a different bank is such a good practice. It allows access to your money if you need it in a pinch, but it also removes that money from your normal viewing on a daily basis. Think of it as an “out of sight - out of mind” habit.


In addition, make sure to refuse their debit card, their banking mobile app, or checks for this new account. Cutting those options from the equation will provide an additional layer of protecting yourself from yourself.


2.Choose the savings account with the highest yield possible


This might seem like a no brainer, but most people fail to take advantage of competitive pricing when it comes to their savings accounts. Most of the time, people go with the easiest option. They don’t want to deal with the hassle of moving accounts or starting a new banking relationship. What these folks don’t realize is their decision could be costing them hundreds of dollars in interest per year 💵💵💵. That’s free money people!


Interest rates on savings accounts are at their highest in a decade, and those who are smart with their money will take the time to shop around at who can help them gain financial independence as fast as possible.


Side note - stay away from CDs when it comes to saving for emergencies. CDs lock up your money for a specific time frame and open you up for interest rate risk. Simply put, the whole point of having emergency savings is to have cash on hand to take care of an unexpected expense. Locking up your money, even if the rate is a little higher than your savings account, will prevent that from happening.


3. Direct Deposit from your paycheck


After you have your bank picked out and account ready to roll, it’s time to start building your emergency fund! By far the easiest way to do this is to auto-withdraw from your paycheck each pay period. This practice affords you the ability to build your account each month without even thinking about it.


Setting up direct deposit typically takes a phone call to your HR department or head of payroll, a voided check, and your account and routing numbers. File your paperwork and rest easy knowing that you’re well on your way to building your financial cushion.


Most people have an idea of how much money they can put into this account each month, whether that be a percentage of their income, or a random dollar figure. If you are nervous and have no idea where to start, dip your toe in the water and start with $50 each pay period. As you feel more comfortable, increase your contribution to this account until you fully fund it. (Speaking of which, check out #4!) 👇👇👇


4. Fund your account with 1 month’s worth of your after tax income, and STOP!


There are many opinions on how much money you should put into your emergency fund; some say $400, while others go as high as 6 months worth of income. All of the “experts” have an answer, but few have actual reasoning behind their decision.


We at Destiny believe that the correct answer is to fund your account with one month’s worth of your after tax income. This means that your emergency fund target should be the amount of income that was deposited into your normal checking account last month. This number should include income from your main job and side gigs, but should not include one time cash inflows (tax refund or inheritance).


The reason we believe in the one month figure is because time is of the essence when it comes to paying off your debt. Wasting your time trying to build a 3 month or 6 month reserve is unnecessary in our mind. The number is too daunting to most of us, follow through is a huge hurdle, and at the end of the day people get so discouraged that they quit before they start.


The key to this step is to get your emergency fund filled as fast as possible. Once this is achieved, move onto the fun stuff; finally paying off your debt with the peace of mind that you are financially protected.


Still think you might need a little help figuring all of this out, or even a little accountability? Good News! We created an app that solves this entire process for you and more → check us out on iOS or Android!

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