How to build an emergency savings fund amid uncertain economy

"AARP: The Magazine" Executive Editor George Mannes gives advice on how to build up an emergency savings and adjust your budget during times of economic uncertainty.

Video Transcript

- Well over a year of inflation has taken a toll on the average American, and their rainy day fund as well. 38% of US adults reported they have no emergency savings, that's up from 34% the year prior according to a recent AARP survey. Now most experts suggest keeping enough cash on hand to cover 3 to 6 months worth of living expenses. That's a daunting goal for those who've seen their savings dip. Joining us now with tips how to improve your saving status, is George Magnus executive director at AARP the magazine.

Thank you so much for joining us this morning. So as we've seen this number of people who don't have enough to cover their emergency savings continuing to rise. What are your top tips then for building or rebuilding your emergency fund, especially if you've had to dip into it?

GEORGE MAGNUS: Well the top tip if-- I would condense all of my tips into one top tip, which is automate. The easiest way to build an emergency fund is slow and steady. And instead of having to make the decision to put your money in a fund week by week, you do it once it's easy to get your bank to transfer money to a separate account, and it should be in a separate account, It could be $5 a week, it could be $25 a month, whatever it is just get started little by every little bit helps.

And so that's really the top suggestion is automate. And really again, don't be daunted, don't be intimidated by when somebody like us tells you it's great to have 3 or 6 or even nine months of money in an emergency fund. Don't be in a small-- longest journey begins with the smallest steps and you should start with that. So that's your first thing automate, put your money into a separate account where you are not tempted to dip into it for everyday expenses. The second thing is really-- sorry, Rochelle

- Oh no, please continue. You had your top tip there I want to hear your second one as well.

GEORGE MAGNUS: -- The second one is, then you've got to do the tough work if you don't think that you have enough to spare. And in fact, our survey found that 61% of people said what was preventing them from adding to an emergency fund, was the high cost of everyday living expenses and no surprise over the past few years that that's the situation given inflation. The Next thing you've got to do, is you've got to really look at your expenses on every day. Open up your credit card bill, you probably have a lot of standing charges there that you maybe even forget that you're paying for every month. You go through and you can say, well, I got the subscription to this streaming service and this one,

Maybe I can cut back on one or two of them. So that's one thing to do is really comb your expenses, especially the ones that are on autopilot and see how you can cut them back. The next thing you can do is, try to figure out ways to find more money. And that of course, is the side gig and it doesn't-- you don't have to print up business cards, it might even be as simple as saying looking in your basement and saying, well, I got a lot of stuff in here maybe I could sell it on Craigslist, I'm not recommending any particular site, but maybe you can sell it and get rid of all the stuff that is gathering dust in your basement.

- So George, I do want to ask you, because for some people they're not actually sure where to track where their money is going. People will want to get a baseline of what they actually need versus perhaps so they can figure out where they can trim. What do you recommend in terms of finding out your baseline for what your essentials are so that you can figure out winter's trim?

GEORGE MAGNUS: Well that's a good question. So what you really need to do is, when you know your essentials by, for example, by looking at the stuff that you've had to pay. So it's just as simple sometimes as sitting down with a paper and pencil pull up your bank statement, pull up your credit card statement you know that there are expenses you have every month, the big three you've got to start with shelter, food, and health. So you go through there and you say, well, I know I got to spend this on rent and I have to spend this on my utilities.

Then you go to food and you say, how much of my food is the food that I purchase at the grocery store? How much of it is stuff where I get home from work late, I'm tired and I do take out those getting home late and getting tired and not having anything around the house and doing takeout? That adds up over time. So really you have the evidence in your hand. It's not like you need an expert to come and tell you this is where to cut back.

You have the knowledge in your hands where you can look at your bank statement, you can look at your credit card statement and you can look at your Venmo and what you're paying your friends for and you can say, once you actually sit down and take maybe 3 months of bills or 3 months of statements and add them all together, no one's going to have to tell you where to cut back you'll know.

- And so then in terms of factoring in things like stock market volatility if you're looking at your investments or inflation as well, how should people be viewing that when they're trying to make regular contributions but they keep seeing certain things ticking up?

GEORGE MAGNUS: Well for that and especially if you're younger the time is really on your side, you have to have a bifurcated view of life. You have to think about, OK, what do I need this month? What are my needs right now and stock market any and either way whether you're looking at short term or long term, what the stock market is doing at that moment shouldn't be affecting your decisions.

So for the short term you say, OK, I need this amount of money and this is the basics to get me through. For the long term what you need is, to take the long view to realize that as important as what's going on, let's say right now with the debt ceiling and everything like that I think 20 or 30 years from now as you're closer to retirement or 10 years from now or even five years from now, you're going to look back on this moment and say, well, that was a blip.

Remember 2008, 2009 we all thought the world was coming to an end and look where we are now, anybody who took money out of the market and didn't put it back in is not doing as well as that person who really took the long view. So you can't let the short term movement of the market distract you from either your day to day issues or your long term goals. And one of the places that we like to recommend for where to get advice about planning both for the short term and for the long term for your security and retirement where we're suggesting you go is shockingly to us.

Go to aarp.org/money, and we have years and years of information and knowledge and collected wisdom of all our journalists with really great advice about how to deal with both short term crisis and also planning for the long term and your long term financial security.

- And George just very quickly, because I know that when we talk about inflation and the stock market impact we did see it was the 30 to 49-year-olds who really saw a significant sort of change in how they were saving and whether they were saving or not. But overall though in the study that you guys did, it did show that people were more optimistic than not over the next 12 months. If you can just quickly tell us, what do you think is driving that optimism?

GEORGE MAGNUS: It could be any, it could be like human nature and I think and this is just a wild guess but it could be we went through the pandemic, And that was awful and it feels, although COVID is still an issue, we are not locked down people are going traveling this summer, people are saying, OK, between the people who do have money and the people who do see a little bit of daylight and the people who haven't been taking vacations because where are they going to go. And I think just maybe it's even just the summer coming you're just feeling great and you just got to get out there and got to go places.

- I do appreciate you joining us with those great tips and all that insight. George Magnus there, executive director at AARP the magazine. Thank you for your time this morning.

GEORGE MAGNUS: Thank you Rochelle.