The coronavirus pandemic transformed the way Americans saved, spent, and earned money. Because of it, many Americans struggled to keep up.
As the new year begins, financial educator Tiffany Aliche — better known as "The Budgetnista" — says that taking some time to reflect and prepare can make all the difference in your financial outlook.
"I want you to think about 2020 and your life like a boat," Aliche says. "You don't really know if your boat is going to float until you put it in the water, until it's tested. 2020 required you to put your boat into the water and you got to see where the leaks are."
For example, not having enough money set aside in savings, spending too much on discretionary purchases, and being fearful about job security are all potential issues. Now is the time, Aliche says, to ask yourself, "Where were the leaks? And what can I do differently to make sure those leaks don't follow me into the new year?"
Video by Mariam Abdallah
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During the Great Recession, Aliche didn't downsize her spending habits to be able to cover what she calls "health and safety" bills. That was a mistake, she realizes now. First and foremost, you need to make sure you can take care of your most essential needs.
"These are expenses that you ask yourself, 'Do I need to pay this to maintain my health? Do I need to pay this to maintain my safety?'" Aliche explains. "They come first. Literally every other thing can wait."
Identifying your health and safety bills can help you prioritize spending. These are categories like housing and utilities. "That means if you don't have income coming in or your income was dramatically reduced, you are not obligated to worry about anything else other than your health and safety," Aliche says.
If you know what your must-cover expenses are, you'll be better able to make fast cuts in an emergency. And you'll have a better sense of how much you need to save in your rainy day fund.
If 2020 taught us anything, it's that the traditional rule of having a 3-to-6 month emergency fund needs updating. "Is three months even really enough? Do you need six? Do you need one year?" Aliche suggests asking yourself.
Financial expert Suze Orman agrees. "Even eight months of an emergency fund isn't enough," she told Grow recently. "The truth of the matter is, it's probable that you should have one year of an emergency fund right now."
Having an emergency fund that can handle a crisis similar to what happened in 2020 can ease some financial burden. Few Americans are financially prepared to handle the unexpected. Just 41% of U.S. adults have enough money put away to cover an unexpected $1,000 expense, according to data from Bankrate, while another 28% have no emergency savings at all.
It can be easy to build an emergency fund over time if you're consistent, though. Putting away just $36 a paycheck will get you to $1,000 in a year. To reach $3,500, the amount Bankrate says an emergency typically costs, requires $135 per pay period.
Putting away part of your second stimulus check can help you start or up your fund, Orman recommends. And then you'll be able to feel more secure. "The most important building block, so that you can grow, financially speaking, is that you have a financial foundation you can stand on," she says. "So when something goes wrong, it doesn't collapse."
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