I’ve been reading news stories over this past week about furloughed government workers struggling to pay their bills.  Because they’re not being paid, they don’t have the money to pay daycare costs, their car payment, or their rent, and a lot of them are feeling desperate.  It’s truly heartbreaking to read about.  I hate to take lessons away from someone else’s misfortune, but this is a critically important reminder that we all need an emergency fund.

When you have money in savings for situations like this one, you can not only absorb those unusual (but not always unexpected) expenses like car repairs or medical bills, but you can also take care of yourself and your family in a crisis when money isn’t coming in, but the bills don’t stop.  And then you don’t have to resort to borrowing at high interest rates (like credit cards) to avoid being evicted or losing your house or car.  That’s a debt trap it can be tough to get out of.

I’m not trying to minimize how difficult it can be to build a savings cushion, especially when money is already tight.  But I would argue that it’s the single most important thing you can do to get yourself on firm financial ground.  If you don’t already have a few months’ worth of expenses in the bank, consider making some changes to where your money is currently going and make this your top priority.  For people who are really struggling with modest income and high expenses, I try to get them to commit to putting $200 per month into the bank.  In two years, if they don’t touch it, they’ll have $4,800.  You can’t live on that for long, but it’s a really good start to build on.

Other ideas:

  • If you get a tax refund or a bonus this year, put some or all of it into a savings account.
  • If you’re coming to the end of a car payment, once it’s paid off, continue to put that same amount of money into savings for a few months.
  • Of course, look at how much you’re spending on “fun” stuff and consider redirecting some of that into savings.
  • Don’t put extra money towards a debt, like student loans or your mortgage, if you don’t have cash in the bank.
  • I hesitate to suggest pulling back on your retirement savings, but if you’re saving for retirement at the expense of an emergency fund, I’d consider reducing retirement contributions for a short period of time – but probably not below what you need to max out the employer match. Saving for retirement is a fantastic use of your money, but once the money is locked in there, it is very expensive to get it back out if you need it in an emergency.

It feels really bad to have to delay paying a bill because you have to wait for payday.  Having a savings cushion is one of the best ways to feel secure about your finances.  It’s really the basis for a stable financial life.