The first step to building wealth is – hands down – having an emergency fund. Yes, even if you have a large amount of high interest debt. This is because not having an emergency fund is an emergency. People lose their jobs, cars break down, deaths happen – life happens. In all these situations, you want to be financially prepared so that money isn’t an additional stressor to your already stressful scenario.
It seems easy enough to say ”you need to start an emergency fund”, but harder to do. Here are some things you MUST consider before starting your emergency fund.
1. Have A Reliable Income
Although this might seem like a no-brainer, this can actually be the hardest thing to do. Especially if you feel like you don’t make enough and are living paycheck to paycheck. If this is you, consider taking these steps to figure out why you are.
The fastest way to check is to go through your recent bank statements and see how much you spent in a month. Did you spend more money than you earned for that month?
If yes: Is most of that money spent on life needs (groceries, rent/mortgage, life-saving medical care)?
- Yes: consider ways to cut down on expenses. Financial experts recommend the common rule of thumb to be spending less than 50% of your income on your needs. Here is a formula to calculate that: income x 0.5 = what you should be spending. This is the maximum amount you should ideally be spending.
- No: This likely means that you are spending more on wants than your needs. In this case, budget!
No: You likely need to increase your income so that you can have money to save! Consider working more hours, finding another job which pays more, and/or getting a second job. It will be hard at first, but know that making these sacrifices will be well worth it for your future self. When you are financially secure, you will look back and thank yourself for taking this difficult step.
2. Have Leftover Money To Set Aside
Now that you have a reliable income, how do you make sure you have money set aside to actually start saving?
If you want to continue using the 50/30/20 rule, calculate 20% of your post tax income to set aside. You can do this by using the following formula: your post tax income x 0.20 = Amount to save.
Of course, you can adjust the 50/30/20 rule to your liking and save whatever percentage is realistic for you. Maybe you’re more of a 50/40/10 person, or 50/10/40 person. The more you set aside to save, the faster your emergency fund will build, and the faster you will be able to tackle the next steps toward building your wealth.
3. Open A High Yield Savings Account
A high yield savings account is just another savings account, but one that earns you WAY more interest than a generic one. This is important because if you have money lying around in an account for emergencies, you want to earn the most interest on it.
To put things into perspective:
Bank of America currently has an Annual Percentage Rate of 0.01%* for their generic savings account. This means that if you have $10,000 sitting in that savings account, you will have earned an additional $100 in interest – giving you a total of $10,100 by the end of the year.
High yield savings accounts like Capital One Savings 360 (which I personally use and LOVE), currently has an APY of 4.1%* for their high yield savings account. That same $10,000 savings amount would earn you an additional $410, leaving you with $10,410 by the end of the year with no additional work on your part – except having opened the account! Capital One 360 Savings also has no annual fees or minimum deposit requirements – making it an AMAZING choice for those who are just starting out on their savings journey.
With time, APYs are subject to change based on the company, but high yield savings accounts will still always take the win.
*values are based on the date of blog post publication and are subject to change