Saving money for an essential emergency fundDate posted: 3/18/15 01:15:00 PM
In addition to having a basic savings account, individuals should also build up an emergency fund for unexpected costs. Without money set aside for a rainy day, people may wind up charging substantial expenses to their credit cards, potentially leaving them with mountains of debt that would have otherwise been avoided, according to Bankrate.
"Many of them could have avoided enrolling in a debt management plan had they had any type of emergency fund set up," Brad Smith, CEO of a debt management company, told Bankrate, when discussing clients trying to avoid declaring bankruptcy."There are many people out there who are living so paycheck to paycheck that a blown transmission would send them into bankruptcy. An injured child or a natural disaster could easily be handled with additional funds."
Know how much to save
Without a goal, saving for an emergency fund can be difficult.
When determining how much to save, it's important to have at least seven months' worth of income that can be lived on comfortably. Consider everyday needs and expenses, bills that are paid monthly and mortgage or rent payments. Do not factor in frivolous expenses. Eating dinner at the nicest restaurant in town shouldn't be factored into an emergency fund budget.
Because seven months' worth of money is a substantial amount to work toward, it might be worthwhile to set a smaller goal initially. For example, people should begin by working toward saving $1,000, and raising the goal once that amount is reached.
Keeping track of money going out can help individuals understand where they are spending the most cash and how to better budget to meet the needs of financing an emergency fund, according to U.S. News & World Report.
After one month of recording all spending, individuals can sort costs into different categories. Food and transportation are important, while entertainment might be an area that can be trimmed to help increase an emergency fund. For example, if trips to the coffee shop are costing $100 every month, cutting them out can help build funds faster.
Make it mandatory
It can be very tempting to spend money on something fun or interesting instead of depositing it in an emergency fund that you may or may not need. However, without that reserved cash, individuals won't have funds to turn to during an emergency.
"The forced savings should feel like a bill-pay transaction that is done on the same day of every month," Smith told Bankrate.
It might also be worthwhile to discuss an automatic transfer of funds during each payment period to eliminate the temptation of spending the money instead.
Use your tax refund
It's especially tempting to spend the money received as a tax refund. However, Kiplinger recommended saving that money instead. This money can provide a much-needed boost to any emergency fund no matter what stage of the game it's in.
Even when tax season has already passed, individuals can still use refund money for savings. By adjusting the tax withholding with a revised W-4 form that more accurately represents tax withholding, individuals can see a higher amount in each paycheck which can be stashed in their emergency savings right away.
Use change to boost savings
Another strategy for adding to an emergency fund is placing all spare change in a jar and cashing it in at the end of the year. While it might not seem like much, those extra quarters and dimes can add up quickly.
"Save rather than blow your excess money," Kevin Gallegos, the vice president for Freedom Debt Relief told Bankrate."By stashing the extra, in addition to your regular predetermined amount from your budget, you'll see your savings soar."
Only use on emergency situations
Once an emergency fund is built up, it can be tempting to spend it, but it is important to avoid doing so. Bankrate recommended making it difficult to access the account to reduce the temptation.
"Do not get access to it via debit card," Smith noted. "And if you are issued a checkbook, hide it."
Individuals should work toward building an emergency fund, and knowing how to best build savings will help greatly.
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