You've never had any savings, but you've managed just fine. But now, with skyrocketing credit card interest and more responsibilities in your life, you want a bit more financial security in your life. If you've decided that it's time to start an emergency fund, follow these steps.
STEP 1:
Make a budget. It's not a good idea to spend money recklessly without a budget. Of course, you don't have much control over what your fixed expenses are. But you can and need to control your variable expenses. Sit down with your partner or spouse and decide on a budget for your variable expenses that will hold each of you accountable for all of your spending throughout the month. Allot a reasonable amount of money to categories such as groceries, gas, entertainment, personal and gifts, and miscellaneous. Then, get into the habit of using cash and keeping receipts. That way, you can track your spending and you'll have a visible reminder of how much money is left in each budget category. The point of making a budget is so that you reign in your spending so much that you're not tempted to dip into your emergency fund to pay off bills. With this cash budget method, you can only spend what you've got each month, and nothing more. That habit is what's going to allow you to save for an emergency fund.
STEP 2:
Set aside the rest. You can start an emergency fund after this step, taking several different approaches. The first approach is to look at your monthly budget and your cash spending at the end of the month. If you've followed the rules, you'll have used only cash for your spending. If you've been diligent about this, you should have cash left in each of the budget categories (or at least some). Start an emergency fund by taking whatever is left in each budget category at the end of the month and putting it into an emergency fund. It's best not to have this money easily accessible, so put it into a savings account or a separate bank that you don't often use so that you've not tempted to dip into the emergency fund for anything other than an emergency.
STEP 3:
Set aside small chunks. If you can, the ideal way to start an emergency fund is to budget for it. Re-do your variable expenses budget to include an 'emergency fund' category. Even $50 a paycheck makes a huge difference at the end of the year, and you'll barely notice the money missing. Talk to you bank about having this money automatically withdrawn from your bank account each paycheck and placed into your separate emergency fund account. Commit to not accessing this money unless it's an emergency. That way, you'll have the security of knowing that you can support yourself with your emergency funds when the unexpected occurs.
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