5 Golden Rules for Saving a 3-Month Emergency Fund

We all know we should have an emergency fund, but to those who don’t, creating one seems like a daunting task. The secret? Have a mapped out plan. The hardest part is making sustained lifestyle changes. The bright side is that even small changes quickly add up to big results.

Unless you win the lottery, you’ll probably have to build your fund over time, like most people do. The sooner you start, the sooner you’ll reach the finish line.

Quick Tip: Building an emergency fund is crucial to your financial life, just like checking your free credit score on Credit Sesame.

Reddit user Brian recently shared his story of saving for an emergency fund with his wife. Like many couples, they started saving their emergency fund when they were newly married and expecting a baby. The recent marriage and impending parenthood were a wake up call. “It was time to get better at saving,” he says.

1. They set a goal

The first step is to set a realistic goal. Brian’s initial goal was to save $1,000. If all you do is put $30 a month into savings, you’ll have $1,000 in under three years. If that seems like a long time, remember two things: (1) time goes by faster as you get older, and (2) it’ll still be $1,000 more than you’ve got in the bank right now.

Indeed, saving $1,000 might be easier than you think. “Our expenses then were low and by cutting back on eating out and entertainment we were able to achieve that in a couple of months,” says Brian. When they reached the first goal, they set their next goal (three months’ savings).

2. They treated savings like a bill to pay each month

“The most important thing we did was create a budget and stick to it,” says Brian. “Prior to that, we both just spent money without any thought.”

To create a budget that works for you, you must first know where your money is going. Track it for three months. You can do so manually or use an online budget tracker.

Some banks offer free budgeting software to account holders, or you can use a free site like Mint.com. Without much customization you can view general spending categories. Utilities, credit cards, loan payments and other easily identifiable expenses tend to fall into the right columns.

You may need to work with the program a bit if you frequently spend cash, since the software has no way to know what you bought or what stores you visited, or if you find that some transactions need tweaking. Also, Mint allows you to easily edit multiple transactions simultaneously if you need to make the same change to a batch of similar items.

Then decide how much you want to reduce your spending in order to have something to contribute to savings each month. Can you make a 10% cut across the board? Can you change daily habits and save $50? Can you put off a purchase or two and put $100 in the bank?

Most importantly, savings should be a firm line item in your budget. Make it a bill that you have to pay every month, not an optional luxury.

Set up an automatic recurring transfer from your checking account to your savings account, and commit to ensuring that the money is available each month for the transfer.

3. They made changes

Consider your own priorities and decide where to sacrifice your spending. Some people get good results by skipping Starbucks or the nail salon. Others are miserable without these treats. Whether it’s eating out less often or lowering their thermostat a degree or two, the choices are yours to make.

Specific opportunities for savings will be more apparent after you track your spending for a couple of months. For Brian and his wife, casual spending was a clear culprit. “Cutting expenses… was pretty easy. It meant not going out all the time and spending money on things like restaurants, trips, clothes,” he says.

A short-term intensive savings strategy can work, too. Try a financial fast, where you don’t buy anything except what’s absolutely necessary for three weeks. When Brian’s wife lost her job, they immediately went into austerity mode.

“In the 6 weeks she was not working we actually spent down less than one month of expenses from our emergency fund,” he recalls.

4. They got creative

Brian has some good advice that applies to many would-be savers: “If you’ve budgeted and cut out every possible thing that could be cut and you still can’t save, then it may be time for a second job or a side business to make some extra money.”

After all, the key to saving money is to spend less than you earn so that a little is left over for the fund. If you are stretched to the limit, then the only way you’ll get ahead is to bring in more money. If you’re lucky, you’ll think of something that really works for your lifestyle.

Brian enjoys being outdoors so he decided to buy a chainsaw and spend a few hours each week cutting up dead and downed trees. He brings the wood home to burn and saves between $1,000 and $1,500 each year on heating costs. Plus, his friends and neighbors appreciate not having to hire someone to remove the excess wood.

5. They continue to pay attention to cash flow

Brian and his wife now have the comfort and security that comes with knowing that they are financially prepared for many of life’s unexpected events. They didn’t get an inheritance or other windfall.

They just paid attention to their cash flow and dedicated themselves to building that fund. As Brian aptly points out, “It’s not life changing money by any stretch, but every little bit helps.”

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Published December 29, 2015
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