Ramit Sethi: 5 Steps To Build a 12-Month Emergency Fund Fast
Building an emergency fund doesn't have to take years. If you don't currently have one, or the one you have isn't sufficiently funded, personal finance expert Ramit Sethi has some advice to help you change that.
Here are some of his best tips to quickly build a 12-month emergency fund. Following them will speed your journey to having the security of an emergency fund much faster than you might imagine.
Cut Discretionary Expenses
Sethi recommended eliminating as much non-essential spending as possible, and doing so fast to redirect this money where it's needed most right now — i.e., your emergency fund.
Several, although far from all, of the good ways to do this include reducing energy costs, finding ways to reduce impulse purchases, negotiating rates with service providers, buying secondhand, seeking out free entertainment, looking for sales, canceling unused subscriptions, cooking at home, shopping your insurance coverage and taking on an accountability buddy, according to Fidelity.
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Delay Major Purchases
Whether you're planning to buy a new car, renovate your home or move, Sethi said now isn't the time to do so.
"I would avoid major new expenses, which always come with phantom costs," he posted.
In March, the average cost of a new vehicle was $47,462, according to Kelley Blue Book. Also pricey, the average cost of a local move is $1,250, rising to a range of $1,123 to $14,104 for a long-distance move, according to Moving.com.
Clearly, putting a major purchase off for a year or two can fast-track your emergency fund savings.
Stretch Out Regular Expenses
It might not be easy, or even possible, to completely avoid some of your standard expenses. However, Sethi advised finding creative ways to save money on these necessities.
For example, he said extending personal care timetables by a month can save you hundreds of dollars per year. This adds up, as the average cost of a haircut is $35 to $150 (or more), and an additional $65 to $200 for highlights, according to Thumbtack.
Stop Overpaying on Low-Interest Debt
Wanting to pay off all of your debts is admirable. However, if you don't have a 12-month emergency fund, Sethi said to consider stopping the extra payments on high-interest debt right now and putting that money toward savings.
Another thing to ponder, paying off a loan early could temporarily lower your credit score. Depending on the terms of your loan, you might also face prepayment penalties. However, this must be weighed against how much it will cost you in additional fees and interest to extend the timetable for paying off your debt.
Consider Reducing Retirement Contributions
Typically, personal finance experts don't recommend saving less for retirement. Serving as an exception to this rule, Sethi said it can make sense if you're in a particularly precarious situation — i.e., a single-income family where you wouldn't have enough saved to cover expenses if you were laid off.
Do note, he didn't advise temporarily halting retirement contributions altogether. Instead, he recommended saving less, but still contributing enough to get a full employer match (if your company offers this benefit).
For example, if your employer matches contributions up to 3% and you're currently saving 10%, you might lower your contribution amount to 3% for a few months. If you're earning $3,000 per paycheck, you'd (temporarily) reduce your contribution from $300 per pay period to $90.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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