You never want to be caught in an emergency with no savings. And yet, this is precisely the situation millions of people are in right now. The average in America is just $5,000. Here’s how to bump your up a little higher.
Set a Process-Driven Goal
Most people fail to succeed when their goals are outcome driven. In other words, when you make a goal that requires you to experience a specific outcome that’s beyond your control, it’s much easier to fail at achieving that goal and, even when you do succeed, you never really know why.
In a sense, it was all luck.
With a process-driven goal, you have more or complete control over what happens and whether you achieve the goal. So, a process goal might be to “save $500 this month.” Or, it might be “.”
These are processes that you control.
Contrast this with an outcome-based goal that you can’t control like, “earn 10 percent on my investment this year.”
You have no control over your investment accounts. If you make these types of goals, you’re setting yourself up for failure. Sometimes, outcome-driven goals are a little trickier to spot. For example, you might make the goal of “saving $10,000 this year” as a yearly goal. Is that even possible?
Can you control something like that? In most cases, you can’t, unless you have a contractual guarantee with a bank or an insurance company for that sum of money. Even then, there may be emergencies that spring up between now and then that prevent that outcome.
Watch Out For Preventable “Unexpected” Expenses
Some expenses seem unexpected, but are actually preventable. Car accidents can become an “unexpected expense” for many because they seem to happen randomly.
But, do they?
Many factors contribute to an accident, including the skill of the driver, the state of mind during an accident, and the road conditions.
So, while it might be easy for a person to blame the accident on the weather, there is usually something that person could have done to minimize the risk – drive more slowly, for example. If you get into an accident texting or talking on your phone, eating, or putting on makeup, then the accident is totally preventable.
Keep It Liquid
One of the biggest mistakes people make with their savings is that they switch to a long-term savings account too soon. In other words, they start pumping their 401(k) or IRA (or some other retirement account) with money that they might need in case of an emergency.
And, while it’s true that some 401(k) plans allow hardship withdrawals, it’s generally easier to get at money in your savings account. So, you should keep your emergency money in there.
At least 6 month’s worth of expenses is needed in case of most emergencies. And, that’s a nice cushion to have if you’re ever unexpectedly terminated from your job.
Eventually, longer-term financial planning is necessary, which will bump liquid savings up to 1 year’s worth of expenses. But, start with 3 months, then move to 6 months.