If your car breaks down, you experience damage to your home or come down with a sudden illness, you want to be prepared to pay for bills that may not be included in your regular budget. With the risk of going into debt from unpaid bills, you should protect yourself with an emergency savings fund.
While an emergency fund could cushion the financial blow of unexpected expenses, not many people think they are able to put aside money each month. A Bankrate.com survey revealed about 1 in 4 Americans do not have an emergency savings fund. Since having money in reserve is crucial to helping you get back on your feet after a surprise bill, here are five ways to better save:
1. Determine How Much to Save
You will want to calculate the amount of money you should have in your emergency savings. Some personal finance sites recommend at least three months' worth of your take-home pay. Mint.com suggested having three to six months of income in your account. This amount could vary based on your monthly expenses and lifestyle. In the Bankrate.com survey, 24 percent of respondents had less than three months' expenses and 17 percent had three to five months worth saved.
2. Treat Your Emergency Savings as a Financial Goal
Calculate how many months of income you want to save and establish that figure as a financial goal. For example, if you have a post-tax pay of $50,000 and want to have three months' worth of income, you will want to set aside $12,500 of emergency expenses. The reason you want at least three months' worth of savings is to make sure you have enough money to get through a period of unemployment or other event that could make you less financially stable.
3. Set Aside a Portion of Paycheck Automatically
Once you know how much to save as your goal, you could use tools and technology to build up your emergency fund. Banks usually have the option to automatically deposit some of your paycheck into a savings account. Make a separate account for your emergency fund and set up automatic savings.
4. Keep Track of Your Savings
After you start saving, you will want to ensure you are making progress toward your goal. Use a budget calculator as well as regularly log into your bank account to see whether you are on track to achieve your savings goal. These tools can also remind you to save every month so you accomplish your financial objective.
5. Cut Unneeded Monthly Expenses
While you have monthly subscriptions to the gym or cable, you don't necessarily need to spend this money each month. You could find ways to cut expenses in certain spending categories of your budget, such as by cutting the cord and choosing a media streaming service instead, to put this left over money into your emergency savings instead. Not only will you grow your savings fund, you will also shave off your average monthly expenses.