One of the best things you can do to increase your financial stability is create an emergency fund. The lack of a financial cushion can precipitate a lot of money problems. You don’t have enough money to cover a bill, so you end up having to pay a late fee on it, or an automatic payment clears through your bank with insufficient funds and you pay a hefty fee to your bank. In more serious situations, an emergency fund can help you pay for unexpected medical care for you, your family or your pets.
It can also cover the costs of car repair and can keep you afloat during unemployment. Without access to these savings, you could end up with a large credit card debt and substantial interest payments. There is a real sense of security in having an emergency fund, but if you are living paycheck to paycheck or are just not great at saving, how can you build one up?
Identify Ways to Save
Figuring out how to save money is about both finding the money and making the process as seamless as possible. The best way to accomplish the latter is to have a certain amount of money from your paycheck automatically deducted and placed into a separate account. You may also want to shop around to see what bank offers the best interest rate for savings or similar easily-liquidated accounts. It won’t be a huge amount, but every little bit helps.
The former requirement is a little bit harder. You should make a budget and try to cut back on your monthly expenses even if only means saving $5 per week. Over the course of a year, that’s more than $1,000. However, you may also be able to find cash in unexpected places. For example, refinancing student loans with a private lender can mean a lower interest rate, lower payments and money left over each month.
Start Small and Grow Big
You should eventually aim to have six months of expenses and possibly more if you are a freelancer. However, to start with, you can aim for just $500. Even this much will give you a huge amount of financial security compared to $0. You can set small, achievable goals beyond that instead of trying to think in terms of saving the equivalent of six months or a year of your expenses. For example, you could aim first for one month and then three months of expenses.
Use It but Rebuild It
An emergency fund doesn’t help much if you don’t use it. The next time you are faced with an unexpected but necessary expense, don’t reach for plastic—unless you are trying to build up rewards and will pay off the charge before it accumulates any interest. Your emergency fund is there to be used. Of course, once you have dipped into it, you need to focus hard on rebuilding it. If you have used it for a period of unemployment or another big expense, this could take a little while and might mean going back to the beginning of this article and starting again: finding the money, setting a small goal and watching it grow.