According to a CNBC report, over 60 percent of Americans have not been able to save enough money to cover a $1,000 emergency.
You have probably heard it is important to have an emergency fund to help you plan for unexpected expenses you may have in the future, but how to go about that is more to the point. The economy in the United States is unpredictable, and your own circumstances may be as well. Having extra money in the bank can give you a financial cushion, in case you fall on hard times. For example, you may need to rely on your savings if you ever lose your job suddenly. Understanding the need for an emergency cushion is one thing, but figuring out how to make that happen in your life is another.
Depending on your personal and financial situation, you may also want to save money for other purposes. Perhaps you have children who will need college funds or you want to save for your retirement by funding a 401 (k) or IRA account. Use this list of techniques to help you decide how much money you should put away and start creating your nest egg today.
If you have no emergency fund at all yet, you must prioritize starting one. In the beginning, contribute whatever amount you can to it, but keep your end goal in mind. The goal must be to create a fund that can support you for a few months, if necessary. However, it is unrealistic to expect to create a full emergency fund immediately. Your income is not likely to be large enough to allow you to save so much money quickly. Instead, slowly increase the fund with small deposits each month until you feel it is large enough. For example, toss your change into a jar and at the end of the month convert it to cash, then deposit it. That amount will add up and it will not have been a significant drain on your resources.
If you do not know how much you need to save, examine your lifestyle.
How much money you need to save will be directly impacted by your financial goals. For example, if you are a recent college graduate, you may have a lot of student loan debt. If your goal is to pay off student loan debt as quickly as possible, you may not want to save extra money. Instead, you may choose to make higher loan payments now to get out of debt before worrying about savings. Although that strategy sounds good, it can leave you vulnerable if an unexpected financial obligation or emergency arises.
If you are more focused on saving for your retirement, saving extra money now is important because you will receive a double benefit from doing so. You will build your retirement fund faster. Also, you will be spending less money. By getting in the habit of spending less, you will also require less money by the time you retire. Starting such a savings strategy early on in life may even help you retire earlier than you otherwise could because you will have your retirement nest egg saved earlier.
One clearly established savings method recommended by experts is the use of the 50/30/20 rule. The rule is a method for budgeting your money in a simplistic way. Using the method, your budget should be split into three main categories.
You will use 50 percent of your income to pay recurring fixed costs.
The next 30 percent of your net income will be used for discretionary spending.
The remaining 20 percent is money you can use to meet your financial goals for the future.
You can distribute the money as you see fit into your emergency fund, retirement plans or other long-term savings accounts, such as college funds for your children.
If you opt to try saving using the 50/30/20 rule, you should amass a basic emergency fund first. Although, you can add extra money to that fund later, if you so choose. You must also decide how you are going to categorize certain expenses. For example, you could consider food costs to be part of the 50 percent or part of the 30 percent. Either option is fine, as long as you consistently count food in the chosen category.
Another popular option is to save money separately for each of several categories as part of planning your monthly budget. To do so, you must decide what scenarios you wish to save for. Then save a set amount of your income each month for each of those scenarios. For example, you may choose to create separate savings account for housing emergencies and medical emergencies. The funds you can comfortably save for each category will depend on how much you must spend on other monthly expenses.
If you do not feel capable of following the 50/30/20 rule right away, start by focusing on setting aside 10 percent of your net earnings every month for savings purposes. The types of savings account you put the money in will not matter right away. The point is to simply save a consistent amount each month, even if the amount starts out low. Keep in mind saving 10 percent of your income is a good start, but it is best to increase the amount you save monthly as soon as you can. If you can reach a point where you are saving 20 or 30 percent monthly on a consistent basis, you will have far more financial stability in the future. You can further make this easier on yourself by setting up an automatic transfer using online banking. That way a set amount is transferred into your savings each month at a set time. It is a good idea if you use this method to make the savings account invisible to online banking reports, because often out of sight is out of mind and you will not be tempted to dip into it.