Also known as a rainy-day fund, the money in this savings account will tide you over in case you lose your income or have a major expense come up.
A larger emergency fund (nine to 12 months) may be warranted if your income is variable or uncertain, such as freelance or travel work. However, no matter what your goal, you want to commit. “Too many parents are worried that they won’t be able to save the ten to fifteen percent of their income many experts recommend, so they do not even start,” Christensen says. “Initially, committing to save something (even five dollars) is more important than the amount you are saving.”
The foundation of financial well-being is knowing what you’re spending your money on. If you don’t know how much you spend per month, you’ll need to create a budget and reduce expenses. Minimizing your expenses to practical necessities (housing costs, utilities, food), which are harder to get rid of than entertainment items (you don’t need both Netflix and Hulu, we promise), will bring more money in your pocket and, eventually, in your emergency fund.
Michele Lee, a registered representative of Guardian Life Insurance in Jericho, has tips for cutting expenses. “[First], examine current bills. See where the money is going and think of cutting out extras and finding cheaper alternatives. [Next], pay with cash. There's something about the tactile quality of cash that makes it hard to part with. [Finally], adjust your habits. All of us have habits that we fall into that can be revised and made more financially healthy,” she says.
Make a list of recurring purchases that happen every month, such as gas, mortgage or rent payments, and child care, and tally the total. There are free online tools to make this easier, such as Mint.com and PersonalCapital.com, which link to your bank account and automatically categorize your purchases. You can even create email and text alerts that will tell you when you have exceeded your set limit.
If you have debts with interest rates that are higher than 10 percent, you should “focus the bulk of your discretionary cash on paying down your debts,” Christensen advises. “But still contribute something—even five or twenty-five dollars a month. …If you can’t save while repaying your debts, you won’t save after your debts are paid off.”
Figuring how to create an emergency fund can be scary; after all, the word “emergency” is in the name. However, the benefits of having one—financial, emotional, mental—all outweigh the slight headache that comes with budgeting and saving. Simply having an emergency fund will put you ahead of the majority of the country, but, even more important, it will put you ahead in your own life.
Get into the Saving Mindset
Now comes the fun part: depositing the money and watching your savings grow. There are numerous ways to get funds into your emergency account, many you will find as you experiment, but here are three easy things you can do.
Create a Recurring Direct Deposit
The best way to save is when you don’t even think about it. Almost all banks will have an option online that lets you set up recurring payments from your checking account into your savings and vice versa. On the date you choose once a month, any amount of money can be automatically deposited into your fund without you having to lift a finger. Trust us, you won’t even notice it’s happening.
Even better is to have the money taken straight out of your paycheck. “Most employers offer two or more direct deposits,” Christensen says. “Set up a deposit to your savings so you do not even see it in your paycheck.”
Setup a Change Jar
A change jar is the one thing everyone should have, yet no one does. Whenever you get extra change, put it straight into the jar. While putting in 15 cents every couple of days doesn’t seem like a lot, it adds up over time. Just 1 pound of quarters equals $20; imagine how much money you could have by simply storing your change over a few months.
Recruit a Savings Buddy
Behind religion and politics, money is seen as a rude topic to discuss among family and friends. However, when it comes to your saving goals, having a ‘savings buddy’ can help dramatically because it gets you accustomed to talking about saving, as well as keeping the idea of gathering funds in the forefront of your mind. It also creates a competitive edge; both of you can set a savings goal and see who achieves it first.