This Should Be Your No. 1 Financial Priority — No Matter What
Tags: Money, Financial Planning, Budget

We all have financial objectives that are high on our “must do” list. For some people, that means getting out of credit card debt. For others, it means shedding their student loans for good. But no matter how old you are, how much money you earn, or what your assets look like, there’s one money move that should take priority over all others: building an emergency fund.

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You need that safety net

Why is having emergency savings so important? It’s simple: Without money in the bank, you risk racking up debt or suffering a host of dire financial consequences when unplanned bills pop up or when your income takes a hit or disappears.

Imagine your car starts having issues out of the blue, and it’ll cost you $1,500 to get it running again. If you don’t have that $1,500 in the bank, you’ll risk having to charge that expense on a credit card. Once that happens, you’re likely to accrue loads of costly interest as a result.

Now here’s a more extreme example. Imagine you’re self-employed and you get hurt in a manner that renders you unable to work for three months. In the absence of disability insurance, you’re stuck with bills to pay and no income to pay them with. As such, you may have to resort to charging all of your expenses on a credit card until you’re feeling well enough to work. But what if you don’t have a high enough credit card limit to cover all of those bills? What will you do then? Beg a family member for a loan? Risk falling behind on your mortgage payments?

The fact of the matter is that living without emergency savings means living dangerously, and not in a good way. If that’s the situation you’re in at present, it’s time to make changes — immediately.

Building your cash reserves

Ideally, your emergency fund should contain enough money to get you through three to six months of essential bills. If you’re nowhere close, you’ll need to make a solid effort to boost your savings as much as possible.

You can start by getting on a budget, or tweaking your current one to make space for some added savings. To set up a budget, list your recurring monthly expenses, factor in sporadic expenses (like your annual professional license renewal or warehouse club membership fee), and compare your total spending to your total earnings.

As a general rule, you should have enough money left over each month to sock away 15% of your paychecks. But if you’re glaringly behind on emergency savings, you’ll want the option to save even more money each month. To that end, you’ll need to get serious about cutting back on luxuries until your savings account is looking healthier. That means no dining out, going to concerts, or springing for rideshares until your emergency fund is more robust.

Another way to build emergency savings quickly? Get yourself a second job. The money you earn from it won’t be earmarked for existing expenses, so saving all of it (minus what you owe the IRS for taxes) should be doable.

If you don’t have a solid emergency fund, you’re really playing with fire. You may have been chipping away at debt, putting away funds for a down payment on a home, or engaging in similarly responsible financial behavior. But if you’re without a minimum of three months’ worth of living expenses in the bank, you’ll need to set your other goals aside and focus on establishing that safety net. It’s the only way to buy yourself true protection against life’s financially damaging unknowns.

This content was produced by The Ascent, a personal finance brand by The Motley Fool.