You’ve heard it time and time again. Everyone should build an emergency fund. Easier said than done, right?
Saving can feel like an impossible task when you’re just getting by each month. But even if you’re living paycheck to paycheck, it’s still possible to build an emergency fund to fall back on.
The key is to start now, no matter how small. Once you turn saving into a habit you’ll build momentum in no time. Here’s how:
Tip #1: Break down your savings goal
First, you need a savings goal. Write down exactly how much you want to save and give yourself a deadline. Ideally, you should have 3 to 6 months’ worth of living expenses in your emergency fund.
If you’re starting from square one, $500 up to one month of expenses is a good starting point. When you hit that goal, you can set higher ones until you have a large lump sum.
Break your big goal down into smaller weekly goals to make it feel more doable. If your goal is to save $500 in 2 months, you only have to save about $63 per week or $126 per biweekly paycheck.
$500 / 2 months / 4 weeks = $63
Tip #2: Give your income a purpose
Where will the money for your emergency fund come from? This is where having a spending plan really helps. Keeping track of your money helps you save more of it.
Give every dollar you earn a purpose. Start by writing down how much you make each month. Then, subtract your fixed monthly expenses like your rent or mortgage, insurance, student loan, and car loan.
Do the same for your variable expenses that change each month, such as your credit card payments, groceries, gas, utilities, and entertainment.
What’s left over should go to your savings goal. After going through the process of creating a spending plan, you’ll probably realize that a lot of money disappears right under your nose.
That’s actually great news! You can manage your cash flow better by reining in excess spending and putting it toward your emergency savings.
Tip #3: Be ruthless about making spending cuts
If you have nothing left over to save, it’s time to put your fixed and variable expenses under a microscope in order to make cuts.
Can you cut your cell phone usage? Cancel cable TV altogether and use a cheaper online streaming service? Spend less on groceries? Cancel your gym membership?
You may have to adopt a frugal lifestyle for a little while to meet your savings goal; it’s well worth it. An emergency fund gives you peace of mind and saves you from having to rack up credit card debt when emergencies pop up.
Tip #4: Find ways to earn more
Having a side hustle, or a small side business, is a popular way to earn extra income outside of a full-time job. Often, you can make even more money from a side business like freelancing than you can at a typical part-time gig because you set the prices.
Think about a service or product you can offer on the side that people need. The best (and easiest) side hustle to launch is one that uses a skill that you already have. So ask yourself:
• What’s something I do better than others?
• How can I use my degree to make more money independently?
• What do I do at my full-time job that I can also do on the side?
• What’s a hobby I enjoy that could also be profitable?
Focus on what you already know and you can start a side business very quickly.
Tip #5: Separate your emergency fund
The secret to growing your emergency fund is to set goals, save consistently, and then leave it alone–except in dire emergencies.
I recommend that you separate your emergency funds from your regular checking account so it’s more difficult to spend. Set up a separate savings account and use automatic transfers from your checking to your savings to hold yourself accountable.
Discover Savings is a high-interest account that offers up to 5 times the national savings average. There are no fees and no minimum balance–so it may be perfect for your emergency fund.
At first, saving and building an emergency fund may seem challenging. But if you stay determined and committed to creating a safety net, you’ll watch it grow over time.
You’ll have an amazing sense of peace and security when you know there’s a financial cushion to fall back on when you need it.