If a sudden car repair or medical bill would send you scrambling, you’re not alone. Nearly half of all Americans could not come up with $400 in an emergency. If that’s you, too, a single unexpected expense could deplete your bank account. To make ends meet, you might have to turn to credit cards or payday loans.
If you’ve done that in the past, you know how the debt can increase thanks to interest. Your balance can end up growing well beyond what you originally spent.
An emergency fund is a necessary safeguard against unexpected expenses and interest charges. In fact, experts say you should have at least six months of expenses saved. But, when you’re living paycheck to paycheck, saving anything can seem impossible, let alone thousands.
Instead, focusing on building a $1,000 emergency fund can be a smart first step. It’s more achievable and still provides you with a financial cushion. Here’s how to create your emergency fund this year:
1. Create a Budget
The first step in saving is knowing where every dollar you make goes. Make a list of all of your expenses, then review bank and credit card statements to track what else you spend money on.
Once you see all of your expenses, you can identify things to cut back. Even small changes can help. For example, a Kindle Unlimited Subscription is $10 a month. If you canceled, you could save $120 in a year. With that simple change, you’d have just $880 to go to meet your goal.
2. Make Dramatic Lifestyle Changes
However, if you’re already living close to the bone, there might not be anything else you can eliminate. In that case, you might need to make more drastic changes.
If you don’t already, consider finding a roommate to split rent and utilities. It’s not an ideal living situation, but sharing your space could help free up hundreds each month. If you have family that is willing to help, you might be able to live with them rent-free while you save. If you have the luxury of relatives nearby who are open to the idea, it can be a great way to get a headstart.
3. Open a New Bank Account
Once you’ve decreased your expenses, set up a new savings account that is solely for your emergency fund. Keeping it separate from your other accounts ensures you won’t be tempted to touch it for non-emergencies. And, you may even be able to score a bonus for opening a new account.
4. Trick Yourself Into Saving
The best way to save is to do so without thinking about it. There’s two easy ways to make that happen:
Set up automatic deposits: Establish monthly deposits to your new savings account. With automatic contributions, the money is set aside before you have a chance to spend it.
Use savings apps: Savings apps like Digit save your change for you. Whenever you make a purchase, the app rounds the amount up to the next dollar and contributes the difference into your savings account. Over time, that extra change can add up to hundreds in the bank.
5. Deposit Any Extra Cash
When you receive a windfall, like a raise at work, a tax refund or even a birthday check from your aunt, you might be tempted to spend it. However, that money is “extra” cash; you didn’t include it in your budget for monthly expenses and bills. By contributing those windfalls to your emergency fund, you can build your savings without hurting your day-to-day life.
6. Increase Your Income
It might be that you just don’t make enough money to save a significant amount. In that case, you need to focus on boosting your income. If a raise or a new job isn’t possible, one way to earn extra money is to pick up a part-time job or side gig. By working just a few extra hours a week, you can increase your income. Putting the extra earnings towards your emergency fund can help you achieve your goal much faster.
7. Leave it alone!
When it comes to an emergency fund, the biggest thing to remember is that you should leave it alone. It can be tempting to dip into it for a vacation, gifts for friends, or a new phone, but your emergency fund should be for true emergencies, only. By protecting your emergency fund, you’ll have the money you need when you need it most.
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