One of the best things you can do for your finances and for your sanity, is to establish an emergency fund. This is an amount of money set aside somewhere safe from you and the ups and downs of risky investments. It is there in case you lose your job, your car breaks down, or some other unforeseen event threatens to break your finances.
Most finance professionals will tell you to save 3-6 months the amount that you need to cover your monthly expenses. While this is the ultimate goal to strive for, often this can be a lofty and potentially impossible goal. In the meantime what is critical, is to establish a small fund to cover an immediate emergency.
It’s more important than paying down your credit card debt. Surprising, I know, but let me explain why. Let’s say your car breaks down and you need to spend $700 to repair it, if you had an emergency savings account, you have that money set aside to pay the auto mechanic, and you could resume your normal debt payments as planned. Without the emergency fund, you’re essentially stuck with the option of going without your car (if that’s even possible) or, more realistically, you’d end up paying for the repairs with your already tired and worn out credit card. This leaves you not only with an additional $700 of debt, but all of the accompanying interest for as long as it takes you to pay off that debt. Many times that interest rate can be anywhere from 15-30% and that can tend to add up quickly.
HOW YOU CAN START SAVING TODAY
Choose a good place to save your money: You want this savings account to be easily accessible in the case of an emergency, but separate from your checking account or any other place where you may dip into it inadvertently (or intentionally for that matter). I typically recommend opening a separate savings account with the same bank where you have a checking account as it will allow you to easily automate transfers. However, if you are someone who has a tendency to overspend on non-emergencies, you may need a little more distance from your money. In that case, look into an external savings account like one through CapitalOne 360 (formerly ING Direct). Bonus: these tend to give you a slightly higher Annual Percentage Yield than a traditional savings account.
Don’t worry too much about the interest rate: Despite the “bonus” above, the point of this account is not really to build wealth, but instead it’s more of a preventative measure to keep a frail financial situation from getting worse. Don’t worry if your savings account has a low rate of return, because that isn’t necessarily the purpose of this money.
How do you start saving?: First try to set a realistic goal for yourself. Do you think you can save $1,000 in one month, two months, six months, a year? Ask yourself what’s feasible and what you can give up to accomplish it. If packing your lunch four days a week would save you $5 per day, you could have $80 in your savings account by the end of the month. If holding off on purchasing a new pair of shoes would save you $100, maybe you can wait and reassess if you really need those next month. Even consider selling some items on eBay or to a consignment shop. This always gives you a boost in two ways, you see your bank account balance rising and you have less clutter in your life. Double win!
Set your goals ahead of time and commit: Once you’ve figured out what you’re willing to give up, it’s time to put your money to work and execute your plan. For example, let’s say that you decide packing your own lunches is the first thing you want to do to lower your spending and you know it will save you about $20 a week. You can really force yourself to commit by setting up an automatic transfer from your checking account to your savings account at the start of each week. Additionally, I recommend checking your budget every morning or every other morning. I know it’s always frightening to see what you’ve spent, but the good news is that you can use that fear as motivation to taper your spending for the day.
Here’s an example of our savings template you can use to set your target savings amounts and track your progress:
Written By: Lindsay Dell Cook
Lindsay Dell Cook is an accountant, turned writer and founder of Budget Babble. She lives in Philadelphia with her uber supportive husband, and enjoys taking their adorable mutt for walks or reading a good book while buried under a pile of cats.