Here’s a move to bump to the top of your list.
- It’s important to set yourself up to stand a financial blow or unplanned expense.
- If your emergency fund isn’t solid, it should trump all other financial objectives.
You may be at a point in life where you’re trying to tackle different financial goals. Those might include paying off your credit cards or putting together an investment portfolio. And juggling those different objectives can be challenging.
But if you ask financial guru Suze Orman, the one financial matter that should take priority over all others is building a solid emergency fund. And if you’re not there yet, that’s the goal it pays to focus on.
Are you adequately prepared for a financial crisis?
You never know when you might lose your job or get hit with a string of costly expenses, like home repairs or medical bills, that your paycheck can’t cover. That’s why Orman insists that building an emergency fund should take priority over other financial matters, like deciding what stocks to buy.
How much emergency savings do you need? Orman says you should have at least eight months’ worth of living expenses available in your savings account. And for better protection, you may want to sock away enough money to cover a full year of bills.
Keep in mind that these thresholds are higher than what most experts were recommending before the pandemic. But the events of 2020 made a lot of financial folks change their tune.
That year, we saw how the labor market could go from relatively steady to downright upended overnight. And so financial experts like Orman want workers to put themselves in a stronger position withstand an extended period of unemployment — hence the higher targets for emergency savings.
How to build savings when money is tight
You may be eager to heed Orman’s advice and focus on building a strong emergency fund — especially if you know what it’s like to have to scramble to cover an unplanned bill. But what if money is tight right now, and you can only save so much?
It’s a situation a lot of people are in these days due to rampant inflation. But one important step is to put yourself on a budget. The simple act of mapping out your various expenses could help you pinpoint areas where it’s possible to cut back.
If your reducing spending really isn’t possible or reasonable, another solution is to get yourself a side hustle. The great thing about today’s economy is that the labor market is nice and strong, so finding an additional income source may not be such a challenge. And that way, the extra money you bring home can be used to complete your emergency fund and give you the financial protection you need.
In fact, you may want to hang onto your side hustle even once your emergency fund is full. That extra income could give you more financial leeway, especially if the economy takes a turn for the worse.
These days, a lot of financial experts are worried that a recession could hit later this year or early next. A solid emergency fund could help you make it through a downturn even if you lose your job when economic conditions sour. And so it’s important to prioritize your savings, even if you have other goals you’re hoping to achieve.
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