According to a recently published report from Bankrate, only 4 out of every 10 people in the United States have enough savings to cover a $500 to $1,000 expense. That means the majority of Americans would have to go into debt to cover an unexpected major expense.
This problem isn’t one that only plagues low earners, it is just as common in high earners as well. That may surprise you, but the problem isn’t that people aren’t making enough money, it is that they are spending too much money.
The linchpin financial principle that we teach is “spend less than you earn.” If you don’t do this, then literally nothing in your financial life will work. Unfortunately, most people think that their problem is the “earn” part of this statement, but the real problem that needs to be addressed is the “spend less” side. Until you are willing to spend less money than you make, you will never be able to build up any savings to break free from the statistic above. And, without establishing some amount of emergency savings, you will always be dependent on debt to overcome financial emergencies.
Level One in the Grow wedge of our Treasure Target tells us to save for emergencies. This is defined as $1,500 first and then once that is established, 3 to 6 months of living expenses. Since most people don’t have this, let’s explore how to begin saving for emergencies.
The first thing to do isn’t actually to start saving - we’ll get there - but the first thing to do is to begin spending less than you earn. As we said above, if you can’t do this you’ll never save a dime. In order to do this, you will probably need to develop a spending plan so that you know where your money is going and where you can cut back. Saving and having a spending plan are inextricably linked, but let’s put them in this order: a spending plan leads to living on less than you make which leads to the ability to build an emergency fund.
The second thing to do is to determine how much you are going to save. An emergency fund is a designated saving fund set aside to cover unexpected excessive expenses (i.e. major car repair, A/C unit replacement, unexpected surgery). The amount you put in here will depend on your family size, your living expenses, and your future goals. We tell people to start with a goal of $1,500 for those unexpected expenses - don’t forgot to set a target date by which you want to accomplish this.
If you have credit card (or other high interest consumer) debt, stick with the $1,500 emergency fund until the credit debt is paid off. Then set a new goal - again with a date - to save one month’s living expenses (whatever that is) and you know that because you’ve done your spending plan. When you have one month’s expenses, set a goal to save for another month, and so on. Ultimately you want 3 to 6 months living expenses in the bank. Keep going until you get there or until you feel God telling you to do something different with that excess.
The last thing to do is to determine where you are going to put the money. It’s best to keep it in a savings account at a bank or credit union. You want it accessible but “out of mind;” so don’t keep it in your checking account either. Look for a financial institution that offers no minimum balance savings accounts and have it automatically deposited there from your paycheck.
You also don’t want to keep it in things like CDs, savings bonds or mutual funds. Those are more for long term savings. Your emergency fund is short term savings, because you’re going to need to get your hands on it when the unexpected but inevitable emergency happens. If you need some biblical encouragement on why you should set up an emergency fund, let’s look at:
Proverbs 21:20. It says, “Precious treasure and oil are in a wise man's dwelling, but a foolish man devours it.”
Imagine the peace of mind you’ll have with an emergency fund, not only because you’ll be able to handle unexpected expenses, but because you’re wisely managing the resources God has placed in your hands.