When you’re just starting out, breaking even every month can feel like a herculean task. With rents on the rise, unrelenting grocery prices and multiple non-negotiable bills each month, finding extra money is a challenge, to say the least. But there’s probably more wiggle room in your budget than you’d expect: And that extra change can help you do something essential for your long-term financial health.
You’ve probably heard of an “emergency fund,” but haven’t prioritized building one. In this guide, we’ll explain why establishing a financial safety net is essential to your long-term financial health — and show you how to get started.
Why You Need A Financial Safety Net
The tl;dr of everything we’re touching on in this guide is simply: “Life happens, be prepared.” Should you lose your job, need to leave work to care for a sick loved one, get into an accident or fall victim to a crime like identity theft, a financial safety net could be the difference between a temporary inconvenience and falling into long-term debt.
And the best financial safety net is the one that adapts as your life changes. So while your expenses may be barebones now, they won’t always be: So founding a bedrock backup fund that can grow with you is a good start to future-proofing your finances.
How to Build a Financial Safety Net From Nothing
Starting from scratch? Perfect. Follow these five steps, and you’ll be better prepared if and when trouble comes your way.
Step 1: Know Your Minimum Living Expenses
This is the minimum amount of money you need to cover your basic expenses each month. To find this number, add your housing costs, typical monthly grocery bill, utilities and minimum payments on any debts you owe. If these numbers fluctuate during the course of a year, estimate an average and go from there.
Step 2: Set Your Savings Intentions
It’s easier to make progress if you set achievable goals. Here’s how we suggest setting up your savings targets:
- First Win: You save enough money to cover one month of your minimum expenses
- Second Win: You save enough money to cover three months of your minimum expenses
- Third Win: You save enough to cover six months of your minimum expenses
Step 3: Calculate Your Monthly Minimum Expenses
This is arguably the hardest part of the process: Be realistic about what you spend. Look back at last month’s spending, and add up the total you spent on non-negotiables.
For example: Let’s say that your monthly must-pay expenses are $900 in rent, $300 for groceries, $100 for utilities, $350 to cover your student loan payment and $50 to make your minimum credit card payment. All together, your minimum expenses for a month are $1,700. This is your first savings target.
Step 4: Redirect Non-Essential Spending
If you’re on razor-thin margins as it is, finding extra cash to put towards a safety net can be difficult. But now that you’ve reviewed your spending, you might have found a few things that you spend more money on than you’d think.
So instead of working more, use the opportunities you identified to cut back, then pay yourself the difference. Even if you cancel a streaming subscription or eat out a few fewer times per month, the savings can add up surprisingly quickly. Just don’t go overboard on slashing your spending: Life is hard, and getting takeout once in a while makes it more bearable.
Step 5: Make Your Money Work Harder
Compounding interest isn’t magic, but it certainly feels that way. Instead of parking your money in your checking account or an envelope (which is actually a great way to budget), open a high-yield savings account. As you work and grow your safety net, you’ll get extra returns just for keeping it in the right place. When you’re earning interest in your sleep, it becomes easier to achieve your goals.
Don’t Miss Out on Free Money
If your job offers a 401(k) matching plan, profit sharing or any other financial benefits, take advantage of them. If you’re not already, you could be missing out on investments that can multiply in value as years pass.
There are also common benefits that can save you money on essentials, too. From pre-tax transit options, incentives for riding a bike or carpooling, employee discount programs and health insurance plans like FSAs, a little research on your part could unlock a lot of flexibility in your finances.
Big Bills Bumming You Out?
Accredited Debt Relief might be able to help. If you have unsecured debts from credit cards, personal loans or medical bills, our debt consolidation program may be the ticket to making your monthly payments more affordable (and getting you out of debt in as little as 24-48 months).