Saving money isn’t easy – at least not for most Americans. According to a GOBankingRates survey a whopping 62% of us have less than $1000 in savings. And only 14% of Americans have $10,000 or more saved.
While you never know when a financial emergency will hit, you can be sure that one will. Your house could sustain serious damage or your automobile could need an expensive repair. You could lose your job, or suffer a serious illness.
How can you protect yourself from these kinds of emergencies? You need to have at least $10,000 in the bank.
Saving that much money isn’t easy, but if you follow, these nine steps, you can reach that goal.
1. Learn your spending
You can’t really start saving until you understand your spending. Apps such as Mint can help you determine this. It will both track your spending and divide it into categories, so you can see where your money goes. If you find you’re spending $200 a month eating out, you might decide to do things differently. Then, you have those little things like drive-through lattes that don’t cost much but that can add up over a month’s time. Once you understand your spending, you should find places where you can save money for your emergency fund.
2. Set realistic goals
Nobody climbs Mount Everest in a day, and it’s unlikely you’ll be able to save $10,000 in one year. While your goal should be $10,000, there’s nothing wrong with breaking it down into more bite-sized chunks. For example, your goal might be to save $1000 in six months, then $2500 in a year, then $5000 and so on. It really doesn’t matter what numbers you choose, so long as they are reasonable and doable.
3. Create a budget
If you don’t now have a budget, you need to make one, and it needs to include your emergency fund. Cutting out impulse purchases can help, but this won’t get you to your goal – at least not according to most experts. If you want to realize that $10,000 goal, you need to allocate 10% to 15% of your gross income to your emergency savings. Just make sure that whatever percent you choose, it’s one you can do consistently and without fail.
4. Pay cash as much as you can
Studies have shown that people who don’t use credit or debit cards typically spend 15% to 20% less than those who do. Paying cash also tends to cut down on impulse purchases. This, again, turns into money for your emergency savings account.
5. Treat your savings account like it was a bill
It can be easier to save money if you set up an automatic transfer just like you pay your bills automatically. How do you do this? You should be able to arrange with your employer to put a portion of your paycheck into your savings account automatically. If this is not possible, arrange to have money automatically transferred from your checking to your savings account. In other words, treat your emergency fund as if it was a monthly bill.
6. Open an inconvenient but high-yield savings account.
Find the highest-yield savings account you can. This is likely to be an online account as they tend to pay higher interest rates then your local banks. But what’s even better is to set up a high-yield savings account separate from your checking account in a bank that’s a distance away from where you live. This would make it more difficult for you to access the money on a whim.
7. Save any windfalls
If you come into an unexpected windfall like a birthday present, a bonus, or an inheritance, resist the temptation to spend it on something fun. Stick it in your emergency savings account instead. This will help you reach your goal much faster.
8. Don’t pay off your credit card debts
This may seem counter intuitive because credit card interest rates are much higher than the interest rate you earn on your emergency savings account. But if you’re paying down debt, and not contributing to an emergency savings account, you’re making a serious mistake.
If you can do both, first tackle the credit card with the highest interest rate. When you have it paid off, you can then take its minimum payments money, and sock it into your emergency savings account. If that minimum payment was $50, this would mean $50 more for your savings fund every month.
9. Treat yourself occasionally
Saving money means sacrificing some of the fun things in life and a fair amount of self-discipline. It’s important to reward yourself occasionally to keep going. And you should work the treats into your budget. They could be a weekend at the beach, a new smartphone, or a new piece of furniture for the living room. The important thing is to build money into your budget – whether it’s for a grande latte or an overnight stay at grand hotel – as this will help you sustain your momentum towards achieving that $10,000 goal.