How to Build Your Emergency Savings in Three Easy Steps

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For many people, building up three to six months of income in cash savings is hard, but your emergency savings is the margin of safety between you and financial ruin.

Your emergency savings is the foundational building block to financial security.

For many people, building up three to six months of income in cash savings is hard, but your emergency savings is the margin of safety between you and financial ruin. Having an emergency cash reserve puts you in a strong financial position to capitalize on opportunities and avoid penalties, like the debt trap, when disaster strikes.

Unfortunately, many people are stuck living paycheck-to-paycheck and unable to free themselves from the cycle of consumption. Here’s why:

Saving is hard. Our brains are wired for short-term pleasure over long-term security.

Our brains also play a whole host of other tricks on us that prevent us from preparing for the worst:

  • We’re overconfident, and when we hear stories of others who incur catastrophic medical expenses we think, “that would never happen to me.”
  • We attribute our accident-free driving record to our own driving skill but never consider that we might have a fender-bender due to another motorist’s distracted driving.
  • We think that just because our company hasn’t laid off any employees recently, it will never happen in the future.

All of these behavioral biases can leave us in a precarious financial position, but you can trick your own brain into building a solid savings habit and set yourself up for financial success.

Here’s how, step by step:

Step 1: Use the power of mental accounting.

We know it doesn’t make sense to tee off with a putter or use a fairway wood on the green. Our brain uses mental accounting to do the same thing with our financial matters. It knows retirement savings accounts, like IRAs and 401(k)s are long-term savings and not for short-term spending on burritos or coffee.

If you don’t have a savings account, open one now, and if your bank allows you, nickname the account “emergency savings.” By labeling accounts, it tells our brain that “this money is off-limits to spend.”

Step 2: Make saving automatic.

Many people try to build a savings habit by manual means. They tell themselves “every payday I’m going to transfer $XX into my savings account.”

You know what? It never happens. There’s always something more fun or urgent they can do with that money. This is where you can use the power of automation.

You don’t have to think about your pre-swing routine. You just do it. It’s embedded in your brain. Do the same thing with your savings. Set up an automatic transfer from your checking account to your savings account that coincides with every payday. When savings is your default behavior, your brain doesn’t put up a fight. It just lets it happen.

Step 3: Track your progress and celebrate your success.

It can take a long time to accumulate three to six months of income in cash savings, but you don’t have to wait that long to celebrate your savings habit. Every transfer you make is one small step towards building a financially secure financial future, which is a cause for celebration in itself!

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