How to Save Money for an Emergency

As carefully as you might plan, unexpected problems can pop up at any time. From a medical emergency or car repair bill to losing your job, these events can affect your budget and may require that you dip into your savings. Before something happens that stretches your budget to the limit, you should begin to save money for an emergency.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Bank account

1. Track your monthly expenses--both the regular ones such as rent, food and clothing purchases and the incidentals. Tracking your income and expenses will let you identify the areas in which you can reduce your spending without altering your lifestyle to a large degree.

2. Identify recurring purchases that you can do without. Many people make daily purchases, such as morning coffee, that they can skip easily. Though the cost of these purchases may be small on a daily basis, the monthly total can be a significant sum of money that you could save for an emergency.

3. Check the interest rate that you receive on the balance in your bank account. If you receive a low interest rate on your money, you may want to move your savings to another financial institution. While you may not have a large amount of money in your bank account, it can grow over time due to compound interest if you do not need to withdraw it for an emergency.

4. Save a portion of each paycheck that you receive. After you cover your necessary expenses, you can reduce your expenses in areas identified in Step 1. The amount that you do not spend in each of these areas can be placed in your savings or checking account.

5. Set a goal for the amount of money that you want to save for an emergency. A typical rule of thumb is to save between three to six months of living expenses. This should include the cost of your mortgage or rent, food, travel and other purchases that you make routinely during a month.

Tips & Warnings

• If you have trouble saving money, you may want to schedule automatic transfers to a savings account. By establishing automatic transfers, you will not see the money available in your checking account and may be less tempted to spend it.
• Do not place the money that you are trying to save for an emergency into long term investments such as CDs. In the event of an emergency, you will need faster access to your savings than these allow.

[stoicsentry]

on 12/11/2008 These are good tips on a very important subject. I am a young man and was just laid off for the first time. Sometimes it takes an event such as that to realize the importance of savings. I think I have learned a valuable lesson now and will be sure to use some of your tips in the future, thank you.