Kieron Walker lives in New York. Prior to becoming a help desk specialist, he handled auto claims for a major insurance company.
Have you ever had your car break down and had no money to pay for the repairs? Has your plumbing backed up and damaged your home just after you spent the last dollar in your paycheck? Have you gone to the emergency room without knowing how you are going to have enough money to cover your co-pay expenses after your insurance kicks in?
If you answered yes to any of the above questions, then you know there are times when people need money that they may not necessarily have. On top of that, emergencies usually happen without giving people any prior notice which makes borrowing money difficult. During times like these, an emergency fund can not only save your finances but it can also help maintain your sanity.
But what exactly is an emergency fund? Just as its name suggests, an emergency fund is a savings account set up to cover unexpected life emergencies. In the absence of the fund, it is possible that you would either incur more debt or not be able to pay the expense at all. Usually an emergency fund is loose enough so that you can withdraw money without penalty, but hard enough to access that you do not feel tempted to withdraw money on a whim.
With that being said, here are some steps to assist you in creating a basic $1000 emergency fund.
First, Analyze Your Spending Habits
Before you can set up an emergency savings account, you are going to have to find out where you are currently spending your money. Without knowing how you spend your money, it is likely that you will continue to overextend yourself and have difficulty generating enough spare money to save.
In order to analyze your spending, you should glance at records to find out exactly how much of your money falls into specific categories. You will want to know how much you have spent on groceries, transportation, entertainment, rent, and every other area of your life.
There are numerous ways to track your expenditures:
- Find copies of your most recent bank statements. Break down your expenses by category going back a few months until you have a good idea of how much you have been spending.
- Use online resources like Mint. The site will compile information from your own bank and credit card accounts, and then sort your purchases into categories for you.
- Break out a pencil and paper. Force yourself to write a log every time you spend money on anything. After a month or two, you should have a journal that reflects all of your spending habits.
Identify How Much You Can Save
After you have analyzed how much money you spend each month, you can start working on which areas you can save money on each month. Try to identify which expenses are necessities (bills, student loans, car payments) and which ones are luxuries (cable tv, eating out, going clubbing with friends). Any cuts you are able to make to your luxury expenses will form the foundation of your new emergency fund.
There are also other ways to make money to add to your emergency savings account:
- Get a second job. Whether it be full-time or part-time, having a second job can be a good source of extra income. Using all or part of the money earned from your second job to fund your emergency fund can drastically reduce the time it takes to reach your $1000 goal.
- Save your bonuses. The next time you get your tax refund or work bonus, try saving it instead of spending it all. Put the bonus money in your emergency savings and let it work for you. This is also a good habit when friends and family give you money for birthday or Christmas presents.
- Make and save money from online passive income ventures. Take advantage of sites like Hubpages and Zazzle. Take the money you earn from writing articles and designing t-shirts and deposit it directly into your emergency fund.
Set Up a Savings Account
Once you know how you plan on earning your extra money, it is time to decide where you want to put it. Determining what type of account you want to use for your emergency fund can be as easy or complex a decision as you want to make it. Sites like Bankrate can assist you in locating banks nationwide. There are a couple of things to consider when choosing your account though.
The first thing to think about is how much the interest rate is on your savings account. Try to find an account that allows you start with a $0 balance and offers you a higher interest rate. This way at least your money will be making money for you while it sits in your emergency fund. Most savings accounts do not have huge interest rates attached to them, but if you search hard enough you may be able to locate one.
The second thing to consider is how easy it is to withdraw money from your savings account when a crisis does occur. You want your account to be liquid enough so that you can take your money out without penalty in case of an emergency. This means you may want to use a local bank or credit union, or even an online bank that can deposit right into your checking account.
However, you want to use an account that is hard enough to withdraw so that you are not freely spending your money in non-emergency situations. If you use a local bank or credit union, take a pass on getting a debit card for the account. The extra time it takes to actually go inside and request a withdrawal can help you decide if the situation is truly an emergency or not.
Deposit Your Money Into Your Savings Account
Now that you have made a savings plan and opened an account, the only thing left to do is start depositing money into your fund. If you have established a set amount of money from your paycheck that you wish to save each pay period, set it up so that amount is automatically drafted from your paycheck. Many companies have payroll deductions set up so that a portion of your paycheck can go directly into your emergency fund without you having to lift a finger.
If you are using income from online passive income sources, set it up so that money moves directly into your savings account each time you get paid. Depending on the source of income, you may be able to have your earnings deposited right into your emergency fund. If not, have your earnings placed in a PayPal account and then transfer them over to your emergency savings account.
Finally, as mentioned before, let your family and friends know about your savings plan. In addition to offering support and motivation, they can also deposit any financial gifts directly into your account for you.
By following the steps above and staying committed to your plan, it will not take long to meet your $1000 savings goal. Once your emergency fund is fully funded, you may even notice that you are no longer stressed out when emergencies do arise. You may also decide that $1000 is not enough to feel secure. If this is the case, adjust your goal and keep on saving.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.