Emergency Savings Tips
How to set money aside for unplanned expenses
October 9, 2012 by Mark Dye
One of the most important, yet usually forgotten, steps of a good financial plan is having an emergency savings account. Unfortunately, that can be hard to start if you’re already short on cash.
Trust me, though—it can be done.
How much you’ll need
Some experts recommend a flat $500, while others suggest up to six months living expenses. The truth: There is no hard and fast rule. After all, if you rent, you don’t have to worry about replacing a roof, and if you don’t own a car there’s no need to worry about a new transmission.
I suggest you try to imagine a few worst case scenarios. What happens if you have no pay due? What if a family emergency forces you to travel across the county? What if you do have a car and it breaks down?
Although this might not be a happy exercise, it does take into account your lifestyle and possible needs. Average the costs and you set that as your goal. (Our family has $1,500 as a goal and is about halfway there after six months of saving.)
Where to find the money
It’s hiding in your spending habits:
- Save $250+ a year on groceries by careful planning and clipping coupons
- A "change jar" can net $100 a year.
- Slash that fast food place twice a week to save $700 a year
- That $30 meal at a restaurant once a week? That’s $1,500 a year.
That’s more than a nice chunk of change right there, and doesn’t even count a reenlistment bonus, hazardous duty pay, or other extra pay you could use to build it up immediately. So look and you’ll find it. (Also check out our Simple Steps to Savings blog post for more tips.)
Where to put it
Wads of cash under your mattress might make it accessible, but that money isn’t going to work for you. Instead, use something that:
- Is readily available—Preferably with an ATM card. But unless you can be disciplined, either stash the card out of sight, or even get one with limited fee-free withdrawals so you won’t be tempted to use it.
- Pays interest—Rates might not be impressive right now, but one percent is better than zero percent.
- Has penalty free withdrawals—Again, you want easy and free access … just not too easy.
- Is FDIC insured—If the bank goes belly up, the Federal Deposit Insurance Corp. will pay you back.
How to put it there
By allotment, so it’s automatic and put aside before you even get the chance to fork it over to someone else. Plus, after a few paychecks, you won’t even notice the money is gone.
Remember: All of this will take some time. So let that money build up over the course of several months, or even a year, and you’ll be happy to have it when you need it.
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