Life is full of surprises. That’s why having a rainy day emergency fund is so important. Putting aside money now is one of the best ways to avoid the need for emergency loans when the unexpected happens in the future. In this article, we identify how to start an emergency fund in six easy steps.
Open a savings account
Your emergency fund needs a home. A savings account is a great place for that because it typically earns interest, and you won’t be tempted to write checks or use a debit card to withdraw funds. For best results, if one is issued to you, leave the debit card in a drawer at home and only pull it out when you need it for an emergency. You need a “set it and forget it” mentality to make this work.
Review your expenses
This and the following step are where you figure out how much you can afford to put aside in an emergency fund. Begin by making a list of all your expenses and any income sources. Don’t leave anything out, even the small expenses. Those $10 and $20 subscription charges can add up and derail a budget if you ignore them.
Eliminate non-essential expenses
Go to the expense side of your budget and separate the list into essential and non-essential expenses. The distinction should be obvious for most items. Eliminate the non-essentials and take a good look at the payments you’re making to lenders or creditors. You may want to refinance a personal loan or consolidate credit card debt.
Put bills on autopay
Once the budget is complete, automating bill payments is next. Paying bills on time each month avoids the possibility of late payments, fees, and making double payments to make up for missed payments. This step can help maintain a savings plan. Consistency is important.
Set up direct deposit
Why didn’t we mention this step before activating autopay? Direct deposit allows your employer’s payroll department to split your paycheck among your different bank accounts. When you give the payroll department your instructions, send enough money to pay your bills to the account set up for autopay, and deposit the amount you designate to the emergency fund account. If you can, consider having a third account to use just for everyday expenses.
Modify your spending habits
Let’s review. You’ve trimmed your budget and have your bill payments set up for autopay. With direct deposit money is sent to the account for paying bills and funds are sent to the emergency fund account. Did you set up an everyday expenses account? Some people prefer to use a prepaid debit card for everyday expenses, so they can’t spend more than the amount loaded to the card.
Whatever you decide, it’s always a good time to modify your spending habits. Try cooking at home for a change instead of ordering takeout. Take a bag lunch to work a couple of times a week. Make your own coffee. These are all lifestyle changes that can save you money. Implement them and you may be able to increase the amount going into your savings account each month.
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