When you’re going about your day-to-day life, you’re not actively thinking about your finances. You may spend a few bucks on a coffee, debate how much to spend for lunch, making some impulse purchases online, and then fill up your gas tank on the way home. But how often are you actively thinking about saving your funds?
Accidents can happen and life comes at you fast. If you were asked to pay $500 for an unexpected car repair, would you be able to afford it without completely derailing your finances? This, unfortunately, is not possible for approximately 40 percent of Americans according to a survey by the Federal Reserve.
To avoid having to take out loans or using credit cards to pay for an unplanned expense, which will cost you more in the long run, set up an emergency fund for you and your family.
How much should I have in my emergency fund?
When you’re calculating this, consider EVERY expense that you have, like pet care, your personal health care, or regular car maintenance.
Calculating your monthly expenses
Calculating your monthly expenses is easy in theory, but depending on how detailed you want to get with your budget, this task can be a lengthy process. Here’s how you can approach it:
- Use a Card, Not Cash. With everything going digital, most people use debit or credit cards for their regular purchases instead of cash. Check your monthly statement and categorize your purchases by viewing your transaction history. If you tend to pay with cash for things, keep your receipt, or ask merchants to email you a receipt if possible so you can keep track of your purchases for the month.
- Eliminate Unnecessary Spending. Categorize purchases deemed as necessary for your day-to-day living, such as rent or mortgage, utilities, groceries, car payments and gas, regular medical expenses for daily medication, and insurance for both your health, home, and automobiles. These are the bare essentials that you’ll need to cover in the event you ever lose your source of income.
- Find Your Base Spending. After calculating all of your necessities, total everything from one month up. This number is your base monthly expenses and is the basis for most budgeting exercises.
- Calculate Your Required Savings. After finally calculating your base monthly expenses, multiply that number from anywhere between 3 to 6 to get a good goal to strive for. Start aiming for three months of savings, and as you continue working, you can contribute more to your rainy day fund.
That's a lot of money to save - how do I get there?
There are a lot of different strategies out there to help you save money, some more obvious than others. Here are a few simple, proven strategies that can help you regularly make an impact on your emergency funds.
Make savings a priority
After paying off your day-to-day necessities, set aside a portion of those funds before you spend money on more fun things. Even if it’s just $20 dollars, you’re then dedicating a portion of your income specifically for savings.
Automate your savings
Check your banking provider to see if there are any features for automated savings. Some common automated savings include having a portion of your paycheck automatically taken out of your check every time you get paid or depositing a set amount on a specific day of the week or month.
For example, one easy thing to automate is just to transfer one dollar every day from checking to savings. While it’s not much - that’s 365 more dollars you’ll have at the end of the year than if you didn’t save anything.
Some banks automatically round up your purchases and put the extra change into your savings. For example, if you spend $4.37 on a cup of coffee in the morning, your bank will round up your purchase to $5.00 and put the extra $0.63 into your savings account.
While $0.63 cents may not sound like a lot, think about how many times you purchase something a day. These small contributions can really add up, depending on how often you purchase things.
How do I prioritize this in addtition to my other financial goals?
If you have multiple financial goals, how do you prioritize one over the other? Your income can only extend so far, so how do you choose? Unfortunately, there’s no set answer on the best strategy, as all financial situations are unique.
Most financial planners suggest prioritizing minimizing debt before building savings, as debt with high-interest rates can grow exponentially and quickly create a much more challenging financial problem to handle.
In terms of savings strategies, it all depends on your current financial situation, your stage of life. Here are some questions you can consider to think about your savings strategies:
- Where are you currently at in your career? Do you project your income to change or grow in the upcoming years?
- Are you planning on sharing financial responsibilities with your partner? What goals do you share together? What goals do you need to tackle individually?
- Is there anybody in your family who relies on you for financial support now or in the future?
- If a large (Over $1,000) expense were to happen tomorrow, do you have the funds to cover it?
- When do you plan to retire? What kind of lifestyle do you want to have when you’re in retirement?
When you’re considering your savings priorities, remember what is most important for that current stage of your life. If you just started your career, it might be safer to build out your rainy day savings before starting your retirement fund, but if you’re a few years out from retirement, you should have a plan set in place for when you’re done working.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.