Tips to Build Savings for Your Emergency Fund

It's Raining Somewhere.

Experts recommend that you save enough to cover 3-6 months worth of living expenses. In 2017, 66 Million Americans have nothing saved. Another 20 percent of Americans have less than 3 months of savings. A recent CareerBuilder survey says 75 percent of workers often live paycheck to paycheck.

With unemployment at about 5 percent, when you look around, 1 in 20 of the people you see is out of work. One or two more are working part-time outside of their field because they can’t find full-time employment.

How many homes are on your street? 10 percent or more of those households have lost a full-time income and can’t replace it easily. Most didn’t expect to become unemployed or underemployed. It can happen to anyone. Many of those unemployed or underemployed don’t have enough savings to weather this storm.

For every $10,000 of income, on average, you can expect to invest 1 month in your job search. Replacing that $50,000 per year job could take 5 months.

Emergencies happen. Collectively, we aren’t ready, and Americans aren’t alone. The Guardian reports a third of UK families are one missed paycheck away from losing their home.

We buy for our cars, homes, and even our lives. Building your savings can help you self-insure for lost income or unexpected emergencies. If you never need the insurance policy you build for yourself through savings, the premiums are yours to keep.

Building Savings: Pay Yourself First

It’s common to leave savings as the last priority. We pay the normal monthly expenses including car payments, mortgage or rent, and the other monthly bills. Cell phones, cable and internet, and entertainment usually find a place in the budget before savings. And then the paycheck is gone.

Many Americans tell themselves they’ll put something away next month or the month after, but the months come and go and the savings account balance hasn’t moved anywhere but down.

The old wisdom that suggests that you pay yourself first has merit. The adage suggests that you put money into your savings before bills consume most of your paycheck and you’re tempted to spend the rest.

While this old nugget of wisdom has merit, it isn’t realistic for many to follow in its purest form. And if it’s unrealistic, it won’t last. The monthly bills have to be paid. In reality, those should be paid first. However, some expenses might not be as necessary as others.

Instead, pursue a workable compromise, a discipline you can keep. After the monthly bills are paid, put money into your savings. You may have to skip an optional expense or two or spend less because now you’ll have less money readily available.

Examine your spending for entertainment in particular. This is where extra money disappears in many households. If you have to take money out of your savings to pay for something that isn’t strictly necessary, you’re more likely to think twice.

Make a Budget

A Gallup poll shows that only 3 in 10 Americans make and keep a budget. That means that 70 percent of us are flying by the seat of our pants. Hey, what could go wrong?

The truth is we have no idea where our money goes. Of course, we know the big expenses. Those big monthly expenses get our attention, but the small stuff adds up and we don’t know the detailed cumulative cost of all that small stuff because most of us haven’t made a budget.

Dig out the bank statements, bills, and pay stubs from the filing cabinet or dusty shoe boxes. It’s time to do the math. You’ll need at least a few months worth of these records because some bills are quarterly and there aren’t 4 weeks in a month; a month has 4.25 weeks. This gives you 13 weeks in a quarter.

Add up your net pay for the quarter. Then make a list of your expenditures for the quarter, listing the largest ones first.

The largest expenditures are likely similar for most households and include mortgage or rent, car payments, insurance, etc. Assuming you don’t plan on selling your house and car to go live in a tent in the woods, you can consider these fixed expenses. Absent a dramatic lifestyle change, these expenses won’t change until the house or cars are paid off. Some of these expenses, like insurance for example, will go up in the interim.

Now add up the small stuff. You’ll probably find some surprises in this pile of miscellaneous expenditures. You’ll also find some money you spent on items or services which can be had less expensively.

Is there a more affordable plan or provider for your cell phone service? With streaming movies and shows available and free HDTV broadcast in many areas, you may not need to spend $100 to $200 a month on your cable bill anymore and can still have plenty to watch.

Also, look at cash and debit card purchases. Cash in our pockets has a way of disappearing and often with little or nothing to show for it. Debit cards are the new cash for many, and have the same magical effect on bank balances, making money disappear without a trace. After the monthly necessities are paid, the safest place for your money to keep it from disappearing is in a separate savings account.

Automate Your Savings

Once you know your true income and outgo, subtract the necessary expenses from your net income. The difference is what you can spend or save. Automate your savings by setting up an automatic transfer to your savings account and commit a percentage of this extra money. You choose the percentage.

Now that your money is one step further away from your pocket and your debit card, you’ll still have access to funds if needed, but unnecessary spending won’t be as easy and won’t happen as often.

Building your savings is possible if you’re committed. Most households can find ways to lower expenses without changing their lifestyle dramatically. If you save only $50 per week through changing service providers, reigning in cash burn, or waiting another week for those new shoes or trip to the movies, you’ve saved $2,600 in a year. For some households, this number is just a starting point.

You’ll probably find as you begin saving more money, you’ll become a wiser consumer, learning to save money in a number of creative ways and questioning the value of items that were formerly black holes in the budget.

Building your savings builds your financial confidence, granting a greater freedom from worry. And whatever you don’t spend, you get to keep.