Once you’ve saved that first $1,000…
It’s time to bulk up your emergency fund. An emergency fund should cover at least three to six months of expenses. See Vanguard – “What’s the Right Emergency Fund Amount?” If you work in a field where job openings are scarce, bulking up to nine or twelve months will put you on sounder financial footing. Id. With those numbers in mind, let’s get started.
- Set savings goals.
- Include saving in your budget and make it automatic.
- Prioritize on spending and find ways to cut back on spending.
- Dedicate 1/3 or more of any bonuses, tax refunds or cash gifts to savings.
Set Savings Goals
While establishing an emergency fund is the primary focus here, it will be easier to save if you set a “fun” savings goal at the same time such as a weekend get-away or family vacation. Once you’ve set your goals decide on a contribution ratio such as $1 to the fun savings account for every $5 to the emergency fund.
Budget and Automate
Add savings as a non-discretionary line item to your budget to prioritize it above all those discretionary expenses like streaming services, going to the movies or out to dinner. Once you’ve budgeted in your savings amount automate it either by setting up an automatic transfer from your checking account into your savings account(s) a day or two after payday or having your employer deposit a portion of your paycheck into your savings account every pay period (many employers will give you the option of splitting your paycheck into two accounts). Automation eliminates the temptation to skip your savings contribution “just this once.”
Prioritize & Cut-back
It’s time to plug those budget black holes and put that money into your emergency fund. This is also that time to cancel one or two of your streaming services (you can sign up again once your emergency fund is in place), eat at home a bit more often, and make sure you aren’t auto-paying items you aren’t really using (like that expensive gym membership).
Split “Windfalls” Into Thirds
End of year bonus, cash gifts or tax refund coming your way? Split the windfall three ways – 1/3 to savings, 1/3 to bills and paying down-debt, 1/3 for fun (because your saving habits will stumble if all of your money is going toward savings and paying bills).