Everyone knows that money put aside for emergencies is a good idea, but achieving that goal can be incredibly difficult. Whether it’s low pay, spending habits or a streak of bad luck, keeping money tucked aside is a challenge for many.
An emergency fund is essential to cover unexpected expenses like a visit to the emergency room or major appliance failure. Worst case, you may need it to cover unemployment if you find yourself between jobs.
How Much Do I Need to Save?
Get ready, because the answer is an eye-opening. Most financial planners recommend that people have up to six months of expenses in their emergency fund.
Now, this doesn’t include six months of Netflix, eating out and other nonessential expenses. You’ll need to do the math to determine that number. Your mortgage (or rent), utilities, gas money and groceries are the essentials. Come up with that number for one month, multiply it by six and you have your target.
Remember, if you find yourself unemployed, Netflix is going to be the last thing on your mind. Well, after a few days of grief binging, anyway!
How Do I Save That Much Money?
This is the part that crushes most of us. It’s hard to not spend the extra money you have from each check on things that bring you joy — whether it’s a sushi dinner or a new video game, it’s easy to spend “extra.” So the first step is to stop thinking of the leftover money after paying essential bills as “extra” money.
Cut nonessential spending. Make a conscious decision to cut those weekly restaurant visits to twice monthly. Start packing your lunch rather than going out every day. Wait for a movie to hit the rentals instead of seeing it in the theater. Cancel that video streaming service you only rarely use. All these small things could add up to hundreds of dollars that you could be saving.
Set a monthly savings goal and stick with it. There is no right or wrong amount to save depending on your financial situation as long as you are saving as much as you can.
Another great option is to pick up a side hustle. If you work a second job, you’re less likely to waste money trying to occupy your time. You could even use your side job as your “fun money” so you can meet your savings goals from your primary income.
Tax refund time? Don’t use it for a new television or rims for your wheels. Throw it directly into savings. Ideally, you’ll adjust your contributions so you nearly break even. Why let Uncle Sam profit off your money? It would do better if it were working for you.
How Should I Save After I Have an Emergency Fund?
Consider getting a high-yield savings account. These pay you a LOT more in interest than a traditional savings account. Many of them have a minimum amount, but where $10,000 in a traditional savings account may net you a paltry $1 in interest, a high-yield account could earn you up to $200. That’s nothing to sneeze at.