As many of us grapple with the coronavirus pandemic, the importance of an emergency fund has come into sharp focus. But how do you save in a pandemic economy?
While it’s not easy, there are some strategies you can follow to boost your emergency fund — even when you’re in the midst of a global pandemic. Here’s what you need to know.
Why you need an emergency fund
Your emergency fund is how you protect your finances from the unexpected. Plus, a liquid emergency fund offers you freedom and flexibility.
“Cash liquidity matters in a stressful financial situation,” says Natalie Torres-Haddad, a financial wellness advocate and the host of the podcast Financially Savvy in 20 minutes. “It can take time to liquidate property and investments. When you need the cash, you need it now.”
Even a small amount can provide something of a cushion, Torres-Haddad says. She suggests basing your emergency fund size on how many months’ worth of expenses you want available to you.
Typically, financial advisors recommend setting aside three to six months’ worth of essential expenses in your emergency account. While some experts point out that six months may not be adequate during a pandemic economy, Torres-Haddad thinks it’s still a good starting point.
“Make six months your goal, but start small if that feels overwhelming,” Torres-Haddad says. “Start by getting one week’s worth of expenses in your emergency fund, and then build up to a month. Break it down and add what you can, when you can.”
1. Adjust your budget
Once you commit to building an emergency fund, it’s time to look at your budget. Leisa Peterson, CFP, author of “The Mindful Millionaire,” points out that many people have shifted their spending online since they aren’t going to stores in person or eating out at restaurants in a pandemic.
“Review your last 90 days of spending,” Peterson says. “If you’re still spending the same amount, but the money’s just moved to something else, that could be a sign that it’s emotional spending and not a true need.”
Consider looking at ways to divert that money from online spending to your emergency fund to give it a bit of a boost.
2. Institute a 72-hour rule
Peterson also recommends using a 72-hour rule before you buy something.
“Being online makes it really easy to buy, so this is the perfect time to enforce this rule for purchases,” Peterson says. “Leave something in your cart for 72 hours. If you still think you need it after that, fine. But if you don’t, consider putting that money in your savings instead.”
3. Automate transfers
One of the best ways to make sure you’re building your emergency fund is to do it without thinking about it, according to Todd Tresidder, a former fund manager and owner and financial coach at Financial Mentor.
“Just set it up to move money automatically into your high-yield savings account or your investment account, whatever it is you’re using,” Tresidder says. “You don’t have to think about it, but it’s happening every week or every month.”
Many apps make it easy to move your money automatically into a savings account or into investing. Digit is a product that automatically analyzes your accounts and institutes a transfer of excess amounts into a savings product. Additionally, apps like Acorns and Stash let you round up your purchases and then automatically move the difference into an account that can grow over time.
However, it’s important to be careful when you use an investment account to boost or supplement your emergency fund.
“For some, using taxable investing accounts can be a way to reach goals faster, but you still want some liquid cash available in an emergency,” Tresidder says. “Don’t rely too heavily on investment accounts.”
4. Get a bank bonus
Did you know that some financial institutions are still offering bank bonuses? While you have to meet specific requirements before you can receive your cash, securing a bonus can be a good way to put a little extra cash in your emergency fund. Open an account, stash a portion of your emergency fund there, leave it to grow and eventually you could get a boost of up to $500.
5. Pull back on some of your debt payments
The CARES Act put student loans into automatic deferment — and stopped interest accruing to boot. If you don’t have to make student loan payments, Torres-Haddad suggests that you consider putting some of that money into your emergency fund instead.
“You’re not being penalized with accrued interest, and while it would be nice to pay down that debt faster, you might need the cash cushion more in the future,” Torres-Haddad says. “We don’t know how long this will last and you might wish you had the bigger emergency fund later.”
In general, Torres-Haddad recommends that you continue working toward your other financial goals even in the middle of a pandemic. However, she does point out that it might make sense to divert some of your money into savings as a way to build your emergency fund.
“Keep paying down that debt and saving for other goals, but prioritize the next six to 12 months and realize that cash on hand might be more important,” Torres-Haddad says.
6. Refinance your home
With mortgage rates dropping, Peterson points out, now might be the time to refinance. A former mortgage banker, Peterson can see the value in refinancing to a rate closer to 3 percent — especially when there are still many people who have mortgage rates of 5 percent.
“You can refi and lower your monthly payment, and then bank the savings in your emergency fund,” Peterson says. “Depending on the situation, you might not even have to get a 30-year loan to see the improved monthly cash flow.”
For a bigger boost to your emergency fund, Peterson says you might even be able to benefit from a cash-out refinance. However, it’s important to run the numbers and make sure it works for you. Weigh the situation to see if it makes sense to get that cash infusion now since it might be too late a few months down the road if your situation becomes dire.
What to do if you can’t save more
The unfortunate reality of the pandemic economy is that you might not be able to save right now. If that’s the case, Torres-Haddad suggests looking around to see what resources are available to help you reduce your costs.
“Look for community resources like food pantries, utility bill relief programs and rental assistance,” Torres-Haddad says. “Apply for these programs as soon as possible.”
Likewise, you might need to contact creditors to see if they have hardship programs you can take advantage of. While interest might still accrue during forbearance, temporarily removing an obligation off your plate can be a big relief.
“Don’t forget to pay attention to the latest news about government programs,” Torres-Haddad says. “FEMA and the SBA had programs, and there are income-driven repayment plans for federal student loans.”
In the end, it might be about just getting through this month — and then the next month.
Featured image by Syda Productions of Shutterstock.