Saving is one, crucial way that you can stay out of debt and it’s easier than you think. Although you might be saving to reach a specific goal (to buy a new car, a home or take a vacation) everyone can benefit from having an emergency savings fund, too.
What is an emergency savings fund?
Simply, an emergency fund is a stash of cash set aside to cover large, unexpected expenses, such as a major auto repair, or a financial crisis, such as job loss or large medical bills.
Why do I need an emergency savings fund?
The financial buffer an emergency fund provides can keep you afloat in a time of need without having to rely on high-interest credit cards or personal loans. This is especially important if you already have these obligations and disposable income is in short supply.
How much should I save?
The answer is, “it depends.” Everyone’s needs and goals are different. A good rule of thumb is to have enough to cover 3-6 months’ worth of basic living expenses. If you lose your job, for instance, you could use the money to pay for necessities while you find a new one, or the funds could supplement your unemployment benefits.
Start small if you must, but start. Having even $500 saved can get you out of many financial scrapes. Put a little something away now, and plan to add more over time.
Where do I put my emergency savings fund?
Because an emergency can strike at any time, having easy access to your money is a must. To avoid dipping into your savings unnecessarily, set up an account that is separate from your primary account. Therefore, a basic savings account is usually best.
How do I build an emergency savings fund?
- Pay yourself first. On pay day (which for most people is every two weeks), immediately transfer a portion to savings. Getting it out of your checking account will reduce the likelihood that you will spend it on unnecessary purchases. One way to do this is by setting up automatic transfers to your savings account each pay day.
- Build a budget that Includes a monthly savings goal. After you account for all of your necessities and bills (rent, food, car insurance etc.) see what you have left over. At least a portion of this “disposable” income should be set aside for savings. This will get you into the habit of saving regularly and will make the task less daunting.
- Give your debit card a rest. Believe it or not, your debit card is not your friend. Although it might make everyday purchasing more convenient, it really disconnects you from your spending and thus puts a wedge between you and your money. Withdraw your “walking around money” in cash each week so it’s easier to keep track of how much you have left (and if you run out before your next pay day, you’re probably spending too much – read on).
- Keep the change. Now that you’ll be using cash instead of your card, when you receive small bills after breaking a large bill, drop a few in the cookie jar and move it into your savings account periodically.
- Reduce expenses. There are dozens of ways to gently reduce spending and free up some income for your savings goals. Examples include cooking more meals at home, saving leftovers (for lunches at work) and avoiding small daily purchases like Starbucks or Dunkin Donuts. You can also look to reduce or eliminate luxury and convenience items such as cable TV (especially premium channels) and large data plans on your cell phone (use Wi-Fi instead).
You don’t have to save much to make a difference. Even a $20 a week will grow to $1,040 by the end of a year. Don’t wait, start today!