You never know what life may bring, so it’s best to have a little extra saved up for an emergency. Building a rainy day fund may look challenging, but a few tips will make things easier. You can create an emergency fund to protect your future by tracking your expenses – find out how below.
Track Your Expenses
If you don’t have a functioning budget and a strong awareness of how you’re using your money, the first step is tracking your monthly expenses. Understanding the dollars going out can help you set your saving targets and begin to build funds.
Too often, consumers tend to think of a budget as a punishment. Instead, try to think of your budget as a tool. Tracking is a key part of creating a budget that works. Review the statements of the credit card you use most often. Open up a spreadsheet and split out what you spend on:
- dining out
- other entertainment
Add expenses such as housing, car payment, insurance, credit cards, and utilities to this spreadsheet. Now is the time to sign up for regular monthly utility payment averages.
You want to be able to sort your spreadsheet by
- Interest rate (if applicable)
- Total debt (if applicable)
For example, your car payment is probably more than your minimum credit card payment, but the credit card interest rate is probably quite a bit higher. If your cash flow is tight, a debt consolidation plan may be the best option to roll up some debts and reduce your monthly interest payments.
Use the information on your spreadsheet to set your first target. If your monthly expense for gas for your car is $50, strive to put that much cash into a savings account. You may be able to find that money on those credit card statements. If you eat out once a weekend, could you skip a weekend and put that money in savings? After one month, you could have your $50.
Learning to Save
Saving money is a mindset. Are the following thoughts true for you?
- You’re broke
- You aren’t a good saver
- Making the minimum is the best you can do
To get away from this mindset, you may need to convince yourself that you can save. One way to do this is to start a savings account in an online bank. Once you have your account set up, lose your password. These accounts pull money out of your bill-paying account and stash cash in an account you can get to, but only after some hassle. Building up savings in this account each month could provide you with emergency savings that will grow unseen. Additionally, online bank accounts often have a higher interest rate.
Get a Little Radical
Once you have your $50 put away, you can enjoy the confidence of knowing that, no matter what, you can keep your car on the road next month. The next fee to cover maybe your weekly grocery budget; let’s say you want to add $75 to that $50.
Plan a free weekend if you’ve been studying up on no-spend weeks and months but aren’t sure if you can commit. On Thursday evening, go through the cupboards and plan your meals until breakfast on Monday. Now you don’t have to go to the grocery store. If you usually go to the laundromat over the weekend, try to pack snacks and water instead of purchasing anything from the vending machine.
Study up on local venues to see what’s free on the weekend. Your art museum or the nearby botanical garden may be free on Saturday. Your local library is always free. Those with children will love a free trip to the park with a picnic in a cooler. For one weekend, spend nothing that you don’t have to.
Once you have this under your belt, stretch it out. Plan for a week, then ten days. A strict no-spend may not be an option, but buying necessities only for longer and longer stretches is a wonderful way to build up savings and pay down debt.
Expand Your Income
Now that you have a month of gas and a week of groceries in your savings account, go back to your spreadsheet. You may want to target a car payment or your rent next. If you find that funds are very tight after paying your bills, sort your list by total owed.
Could you free up a few hundred dollars a month by paying off your car? Now is the time to think about another job. If you’ve got a partner or a roommate willing to work with you, have an honest conversation about home skills vs. money-making skills. If your partner is a great cook and can feed your household with frugal groceries, then you need to be the one considering a second job. Taking the money from a second job and buying take-out is not efficient.
Make your second job a short-term tool. Your spreadsheet can help you track how long you have to work to pay off your car, wipe out a student loan, or get rid of a credit card balance. Put this newly available money right into your emergency fund as you free up these dollars.
The total recommended emergency fund is to have six months of expenses in an easily accessible account. When you start from nothing, this looks impossible. However, if you ladder your savings account each month, expense by expense, building up these savings will be a simpler and more achievable goal.
Focusing on savings can seem counterintuitive if you are drowning in debt. If you find yourself out of money long before the end of the month, you may need to find help with debt consolidation before starting your emergency fund. The professionals at the Consumer Protection Group can help you make the best move to manage your debt and build your savings.