The start of a new year is a great time to assess — or reassess — your financial situation. That could mean a lot of things, like reworking your budget or coming up with a plan to shed some of your credit card debt. But no matter how old you are, how much money you make, or what your existing bills look like, there’s one financial move that should trump all others this January — making sure your emergency fund is complete.
The importance of a solid emergency fund
The purpose of an emergency fund is to have cash to tap in the event of job loss or an unplanned expense your regular paycheck can’t cover. Without an emergency fund, you may be forced to rack up costly debt when bills come in unexpectedly, or when your income takes a hit or goes away completely.
Ideally, you should have enough money in your savings account to cover three to six months’ worth of essential living expenses. If you’re not sure exactly what savings goal to aim for, there are calculators you can use to determine what your emergency fund should amount to. But either way, it’s imperative you see where your savings stand at the start of the year. If they fall short, your primary goal should be to boost them as quickly as possible.
How to free up more money for emergency savings
If you’ve taken a look at your emergency fund and aren’t happy with the number you’re seeing, then your best bet is to come up with a plan to boost your savings. You can do so in a number of ways.
First, set up a budget if you don’t follow one already, or take a look at your existing budget and aim to make some changes. Cutting back on expenses could free up a decent chunk of cash for your savings.
Of course, some expenses are easier to slash than others. If you currently rent a $1,000-a-month apartment and are mid-lease, you may not have much wiggle room there. But if you commonly spend $300 a month on leisure and entertainment, that’s an expense category you can make changes in.
Another option for boosting your emergency cash reserves is to get yourself a second job on top of your main one. Since that money won’t be earmarked for existing bills, you can use your side hustle earnings to pad your savings.
Similarly, you may be getting a raise in 2022. If your emergency fund needs work, a good bet is to set up an automatic transfer so the extra money in your paychecks gets sent into your savings before you’re given a chance to spend it. Or, to put it another way, if your monthly paycheck will be getting a $200 boost, it pays to arrange for that $200 to land in your savings automatically.
Your emergency fund could be just the thing that bails you out when life throws you a curveball. Before you make any other financial moves this year, take the time to assess your savings. And if you’re lacking in that regard, come up with an immediate plan to give your emergency fund the boost it needs.
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