Building an Emergency Fund
You know you need an emergency fund. You’ve been trying to build one, but you just can’t seem to get there. The percentage of people living paycheck to-paycheck ranges, depending on who’s conducting the survey: 47 percent, according to CareerBuilder, and 71 percent according to the American Payroll Association’s survey. Either way, it’s a large number. Moreover, being strapped financially isn’t unique to any particular income level. CareerBuilder found that 21 percent Americans with incomes above $100,000 per year say that they are living paycheck-topay check. How can you get on a better path? First, set a goal. Ideally, you’d like to have six months of living expenses in an emergency fund. But for a true paycheck-to-pay checker, thinking about the ideal makes you laugh.
So, start with a manageable goal of $1,000.Then when you reach that target, raise your goal to one month’s expenses. Then raise it to three months’ expenses and so on. Importantly, you should not give yourself a lot of time to save that initial $1,000. You want to create a sense of urgency for that first milestone. Of course, speed depends on your income level, but even a few months is realistic for many people. I’d say that no one should set a goal of more than six months, or the urgency is lost. Next, you need to do specific things to move towards your goal.
Here are 10 things you can do to build that emergency fund. I suggest that you pick three of them and start working on them today:
1. Set up an automatic transfer from checking to savings on your payday. Make it large enough to be a little painful initially, but not so much that you can’t stick with it.
2. Take a one-month spending vacation. Don’t starve yourself or skip doctor’s appointments if you’re sick, but don’t buy anything that’s not absolutely necessary. Put all of your extra money at the end of the month into your emergency fund.
3. Have a garage sale or sell your stuff on Craigslist or eBay. Some people can generatethe $1,000 from this alone.
4. Use three-paycheck or five-paycheck months. If you get paid every other week, then there are two months each year when you have a third paycheck. If you get paid every week, then you get a fifth paycheck approximately every three months. Most people just absorb this extra paycheck into their spending. Instead, make sure you’re living strictly on your regular number of paychecks each month, and identify the months where you’ll receive an extra one, and put that money directly into your emergency fund.
5. If you get extra money through a bonus, overtime, or an extra commission, put it in your emergency fund.
6. If you get a raise, calculate how much extra you will get on your first check after the raise, and increase your automatic transfer to your emergency fund by that amount. Don’t increase your spending.
7. Get a part-time job or start a small business (without a lot of overhead), and
save everything you earn.
8. Write down all of your expenses for an entire month. Then, pick at least two to
eliminate or reduce.
9. If you’re part of the 21 percent of people earning more than $100,000 who is living paycheck-to-paycheck, when you mahout on the amount that is taken out in Social Security (the income limit will be $106,800in 2011, unchanged from 2010) and your paycheck goes up, put the extra money in the bank instead of spending it.
10. If the above aren’t enough to get you there, consider big changes like driving a less-expensive car or moving to a less costly home.
One final tip: Write down your commitment, and show it to someone. Your chances of success increase exponentially when you publically commit to your goals. It can be a simple statement:
I will save$_______ by ______ (this date) by doing items 1)______________,
2)__________, and 3)____________.
Ten Tools for Building an Emergency Fund