You live paycheck to paycheck. You have debt to pay off and mounting credit card bills every month. You live in fear of a family member getting sick or the car breaking down. You are trapped on the edge of financial ruin and you do not know how to escape.
Every money guru states that you should have three to six months of expenses put away in an emergency fund, but when your income is low and expenses too high, this seems like a pipe dream to many. Take control of your future and avoid financial catastrophe by following this simple step-by-step plan to build your emergency fund as quickly as possible. No matter how little you make, you can get started on a brighter, less stressful future.
1 -- Create a Budget for Both Short and Long-Term Expenses
The first step to getting control of your finances no matter how much or little you make is creating a budget. This does not have to be complicated. All you have to do is list all the money that comes in during the month, from where, and when, and then list all the expenses you pay out in the same time period.
This will include things like utility bills, rent or mortgage, and car payments, but will also include grocery bills, the coffee you grab on the way to work, and date night expenses with your significant other.
The secret to emergency fund building is to spend less than you make and to put away some of that savings regularly. Short term expenses are those listed above: anything you pay for regularly to maintain your comfortable life. Long-term expenses need a budget too. These include things like education costs, buying your next vehicle, and even basic stuff like money for a new haircut or seasonal clothing.
Estimate the costs of these long-term expenses, divide the amount by how many months you have to save for it and put that amount into your monthly budget. That money comes out of your income and gets put in savings or a special account specifically for that purchase. For example, make a car fund that earns some interest and deposit every paycheck.
2 -- Make a List of Emergencies
While creating your emergency fund, you and everyone involved must understand what constitutes an emergency. Your teenage daughter might believe the latest fashion is a true emergency. Your spouse may think the last available sports tickets are. However, if you want money left when a real emergency hits, these types of wants should be crossed off the list.
True emergencies include:
• Home fires, floods, and catastrophic damage
• Vehicle accidents, breakdowns, or damage that require repairs or replacement
• Serious medical issues such as injuries and illnesses
• Loss of job and a period of unemployment
These are the types of things that bankrupt people or even force them into homelessness. Without an emergency fund in place, some may try to cover the associated expenses with credit cards and personal loans. Usually, this gets the family into worse financial straits than before.
3 -- Determine How Much Money You Need to Save
Although "The more, the better," is a great way to look at emergency fund building, you also want to save money for retirement and place some in investments that perhaps make it difficult to get at immediately. A good rule of thumb is to save at least three months of living expenses at a bare minimum. Six months' worth is much better.
Keep this account separate and solvent, which means you can access the money any time you suddenly need it. Then, leave it completely alone until one of the above situations come into play. Your family may decide that other things are emergencies as well, such as pet health issues, but it is wise to figure out these ahead of time and put them on the list mentioned above.
4 – Cut Expenses and Find Ways to Earn More
When you live paycheck to paycheck, the idea of putting a couple thousand dollars in a savings account may feel impossible. For the vast majority of people, cutting expenses or earning a bit more money is within their grasps. You can do it too.
Websites and magazines are full of money saving tips suggesting you do not buy expensive coffees every day, packing your lunch instead of eating out, cutting out pricey cable channels, and shopping sales. For people with low incomes, these things are already part of your life. How can you cut expenses even more?
In the end, if you dedicate yourself to saving just $5.00 per paycheck, you will probably find a way to live on what you have left. Put that $5.00 straight into the emergency fund and it will grow slowly but surely. If you have more than that, grow it faster.
A great way to get more is to find alternate streams of income. Ask for a raise at work. Sell unwanted or extraneous objects you have around the house or even find curbside on trash day. Start using more coupons at the grocery store and put the money you save directly into your account. Sign up for a "Get Paid" program online that gives you cash back or bonus points every time you shop, search, or watch a video. Although these small changes may not seem too helpful, over time they can help you create a brighter financial future.
No matter what type of financial situation you and your family are currently experiencing, you can get started toward a more comfortable and content future by building an emergency fund. Even if you start with $5.00 per week, it is better than if you do not start at all. When one car repair or health scare stands between comfort and financial ruin, working continuously to build up that buffer is necessary. With three to six months' worth of living expenses in the bank, you will have much greater peace of mind and a brighter future.
