7 Steps to Help You Create Your First Emergency Savings Account
If you’re like millions of other busy Americans, creating an emergency savings account may seem daunting. You’re told to save for retirement. Yet, daily life feels like a game of catch-up with bills and expenses. It’s hard to think of saving for an emergency when your life feels like one. You’re not alone.
The average American can’t cover a $400 unplanned expense, and 30% of Americans go into debt just to survive. An emergency savings account is a financial tool to help you relieve these stresses and set you on track for prosperity. Consider this seven-step process to help you build an emergency savings and get out of panic mode.
Step 1: Knock down the mental barrier
Financial news pundits love their big ideas. Many offer ambitious goals for how much you should have in emergency savings. A common suggestion is to set aside 3 to 6 months of expenses. Here’s a list of the most common monthly expenses.
- Monthly rent or mortgage
- Utilities (gas, electric, water)
- Insurance (car, health)
- Transportation (public transit, car payment, gas)
- Credit cards
- Miscellaneous (entertainment, spending)
It’s easy to see why many quit before they start. Think about it: $1,000 a month for rent or mortgage, $200-$300 for utilities, another $200-$300 for insurance. We’re not even half-way through the list and you can already see how this saving goal will top $6,000, $12,000, even $20,000, depending on your situation.
The good news? You can start small. Even having an extra $500 or $1,000 set aside helps. So, let’s start there.
Step 2: Look at your income
Start by evaluating all sources of income. Questions you’ll want to ask include:
- Are you a two-income or one-income family?
- If two-income, does one of you have a more stable job than the other?
- Are you a family with a single income?
- How consistent is your income? Is it dependent on commission?
The goal here is to be realistic about how much money you can confidently expect to earn every month, not what you hope to earn. You may also recognize other side income opportunities to explore when you look at your current situation. Bottom line: set your expenses against what you know you will make. Then you can build more income from there.
Step 3: Evaluate your expenses (honestly)
The path to savings for millions of Americans usually starts with a very hard, honest look at expenses. Your fixed expenses like rent, car payments and insurance are the least likely to change. Variable expenses are where the savings can be found.
Start with utilities. Minimize cooling and heating when people aren’t home and call your utility provider to see about ways to save on bills. Many will encourage doing laundry at off-hours and can make other energy-saving suggestions.
For transportation savings, carpooling, ridesharing, riding your bike (if possible) or taking public transit can help. Consolidate credit cards to low or zero-interest cards or consider a low-interest loan to reduce interest.
And when it comes to miscellaneous spending, a few small behavioral changes can go a long way. Consider these small shifts:
- Brew your own coffee
- Pack your own lunch
- Take a staycation instead of a vacation
- Look at monthly subscriptions, do you really need them?
- Look online for free events
- Shop second-hand stores for clothes
Step 4: Set that first goal and commit
As we said, start small. Think about the last few expenses that caught you off-guard. Was it a $500 car repair? A $600 vet bill? Use these experiences to set your first goal. A lot of people who start small, make $1,000 their first goal. But if that’s not achievable for you, start at $500. Set a time limit, too. Will you achieve that first goal in 6 months? A year? Create a timeline for success. Look at the next six months or year and be realistic about what you can save.
You’ll also want to commit to a set per-paycheck, or monthly, contribution. The savings found when you analyzed your expenses should make this easier.
To kick things off, make an initial deposit. Do you have $100 to start? If not, do you have items around the home you could sell to get started? Is there side work you can do to pick up some extra cash to start the process?
Step 5: Reach your first goal, set a goal for bigger emergencies
Once you’ve met your first goal, set yourself up to tackle the bigger emergencies – the blown A/C system, the plumbing disaster or the more expensive car repair. Your situation may have changed for the better, too. Are you making more? Are there other expenses you can trim? The same rule applies to this goal. Set a timeline and make sure it’s realistic. It could be a two-year goal. That’s fine. Go for it!
Step 6: Revisit your plan regularly
Your goal may never be to have $20,000 in an emergency savings account; that’s fine. In one to three years, you may have several thousand dollars. You can measure this amount against a variety of “what if” scenarios. Do you have enough to cover a couple unexpected $500 or $1,000 emergency expenses? Do you have enough to cover two or three months of mortgage or rent? If the answer is “yes,” you’ve made tremendous progress.
Moving forward, you may consider allocating more money to long-term retirement and reducing the amount you contribute to emergency savings. It’s up to you. But nonetheless, keep contributing. You’ll also want to revisit your strategies and savings activity monthly, quarterly and annually. What’s working? What’s not? How else can you earn more? Save more?
As you save, you’ll feel empowered. That skipped coffee shop outing, the packed lunch, the carpool experience, they will feel less like something you gave up, more like a gift to yourself. Just like good diet and exercise, you’re building momentum one positive habit at a time.
Step 7: Tap helpful tools
Don’t forget, you also have access to online financial calculators, savings strategies and entire communities of people with similar goals. Use them. Remember, you’re not alone. With so many Americans living paycheck to paycheck, a community of savers and others improving their situations just like you are available to you – and you’re available to them, too!