Inflation is at a record high. Prices are rising at the fastest rate in 40 years. And we are on the cusp of a recession — or at least it feels that way. We all talk about saving for the rainy day, and now is a great time to check on those savings. As individual debt rises, many people have had to make a lot of hard decisions regarding our finances, and it’s showing us the value of an emergency fund in a much harsher light.
Some of us are well acquainted with this concept, while it may be mythical at best to others. Whether you’ve been working on growing an emergency fund for a while, or you’re looking to start one to cover the exponentially rising costs, there are many ways to get some solid financial ground under your feet. And now, having something secure to stand on is more important than ever while uncertainty is all around us.
Every headline you read regarding the economic climate is intimidating to say the least. Prices are soaring to levels we’ve haven't seen in quite some time. Inflation is facing the largest 12-month increase since November 1981, hitting a new high of 9.1% in June. Whether we’re headed for a recession, or we’re already in one, everyone’s feeling the effects of inflation in their everyday lives.
Compared to last year, the Consumer Price Index found that consumer goods were up a whopping 8.3% in April. Grocery prices were up 12%, and gas remains 90 cents per gallon more. Credit card bills have skyrocketed due to interest rates. When taking all living costs into account, the average family is spending about $460 more each month just to cover the bills.
On a larger scale, the growth of the economy is slowing. The housing market is cooling down to a simmer, and stock market experts are at a loss for telling us what’s going to happen next.
As a result, a rainy-day fund is more important than ever. There are strategies out there to start building an emergency fund now that will be even more valuable in the months to come.
How to Save
While the goal for an emergency fund is typically to cover 3-6 months of expenses, anything you can save is going to help. You don’t want something like a broken appliance, house or car repair, medical bill, or a broken cell phone to drive you into debt in a ruthless environment like this. Using a loan or credit card to cover unexpected costs can end up being much more expensive in the long run when it comes to interest rates and fees, especially now.
Having savings that are in line with today’s pricing is even more difficult, but that’s the ideal situation. If you’ve got a savings account started, now’s the time to make sure it’ll cover you by adding what you can. If you haven’t been able to get something together yet, it is possible to start now — and we recommend you do.
Where to Save
Where’s the best place to keep your emergency fund? Hint: in a box in your closet isn’t the right answer. Opening a savings account isn’t just smart for safety reasons, but it can actually earn you more than you’d expect. While the interest rates of the Federal Reserve go up, the interest rates for high-yield savings accounts rise in tandem. At the beginning of the year, they were about half a percent, and they’ve since tripled. If that’s the only perk of inflation, we’ll take what we can get! Build your emergency fund using one of these savings accounts, and it will help it to grow without any effort.
Saving Strategies Manage Your Cash Flow
When you’re starting to save, it can be extremely helpful to manage your cash flow. That means you align the times when your money comes in with when your money gets spent. For example, if you have many bills due at the end of the month, it can drain your bank account to its lowest point at that time. If you can stagger your bills throughout the month instead, you can secure a bit extra for each week and have more financial wiggle room than you would if they hit all at once. Work with companies to adjust the due dates of your bills, so you’ll have a better shot at being able to send money to your savings.
Set Up Automatic Redirects
If you are set up with a direct deposit, you can consider having your employer split your paycheck between your checking and savings accounts. Or if you are obtaining income in other ways (e.g., freelancing or passion projects), you can put those earnings straight into your emergency fund. Either of these strategies will help you to save without having to think about it.
There’s also a way to automatically transfer money from your checking to your savings account every month if you’d like to do it that way. Some banks have programs that round up the cents on your purchases and deposit the difference directly to your savings, so if your bank can do that for you, it’s something to consider.
Choose Where to Put Your Money Wisely
Finally, save the big checks! This means everything from your tax return to birthday and holiday cash gifts. While it may be tempting to treat yourself, it can end up being much more valuable to you when you really need it. Putting these gifts into a savings account is an easy way to grow your emergency fund significantly in one shot. This will give you a sense of security and accomplishment that can’t be matched by a luxurious purchase.
Adding Another Source of Income
In addition to savings strategies, we know it’s important to recognize that there are many people who are struggling to simply pay their bills in today’s climate. So how is it possible to save when you can’t even afford basic living expenses?
While inflation hit a record high, employers have also added 370,000 positions across the country, according to the Bureau of Labor Statistics. The job market is strong, and there’s more opportunity to find a side hustle that fits your schedule and needs. Consider your options to help you earn a little extra cash that can help you have more flexibility and security in covering everyday expenses.
Cutting Unnecessary Costs — For Now
Cutting costs can also help you have a bit extra to save. Consider things like streaming services, takeout/dining, vacations as possible ways to keep more money in your pockets. Any extraneous expenses that you don’t have to spend shouldn’t be affecting your ability to build an emergency fund. Go over your costs, and if you can live without it, maybe that money could be of better use elsewhere!
Give yourself kudos, once your emergency funds are at an appropriate level…maybe you turn the streaming service back on, or maybe you realize you don't need it anymore, and start saving for your future self.
Setting up an emergency fund is one essential way to protect yourself from today’s unique financial climate. If you’d like to discuss more ways to build your savings, give us a call at K Wealth Advisors today. We’ll be more than happy to schedule a GoodFit meeting to discuss your goals and options. #KWA