How To, Saving

6 Steps to Starting an Emergency Fund

Path to Savings

The common sense side of you likely knows you need money for life’s little unplanned events, but how much do you really need?

More importantly, how do you find the breathing room in your budget to build savings?

Here’s how to start to emergency fund:

Set a target number that feels possible.

Goal-setting research confirms that people are more successful when they set moderately challenging and reasonably attainable goals.

Financial experts vary in exactly how much an emergency fund should include, but most agree the minimum is three months worth of your salary.

For those how haven’t begun saving at all, however, the thought of stashing thousands of dollars can seem impossible.

Approach emergency savings like you would any long-term goal, and shoot for progress, versus the end game.

Calculate what three months worth of your salary amounts to so you know the large number to aim for—but divide the sum into smaller weekly figures that you can take action towards, little by little.

[Related Link: Emergency Fund 101]

Make saving a non-negotiable expense.

Most people wrongly believe that they don’t have any income to save, because they expect the money to appear out of nowhere.

Savings is a process that you must be proactive in directing. Build the “expense” of saving into your budget, just as you’d approach a utility or credit card bill.

If you knew that going out to dinner with friends would make you unable to make your monthly car payment, for example, you’d have no choice but to postpone plans. Be just as disciplined about saving.

[Related Link: Stormy Weather: Are Americans Prepared for a Rainy Day?]

Be real about needs.

Pew Internet Project data indicates that 46% of mobile phone owners in the United States had smartphones in 2012.

Yet, Bankrate’s Financial Security Index poll revealed that 24% of Americans have no emergency savings at all; 22% that did said their emergency savings would cover, at best, three months’ worth of expenses.

Get the point?

If you don’t have an emergency fund and don’t think you have the money to save, take an honest look at where your money goes each month.

Ask yourself: If I lost my job, could I still afford this? If you answer “no,” it’s a want—not a need.

Once you’ve identified all of you non-essential expenses, rank them on a scale of importance in regards to the emotional payoff.

If dining out, for example, is the highest on your list of expenses with emotional payoff, keep it, but strive to manage what you spend doing it by reducing frequency, ordering from the appetizer menu, or going during happy hour specials.

Allow yourself to keep the top two budget items you ranked as most important—but commit to giving up your other non essential expenses.

Psychologist Dr. Joseph Cilona explains ,“The more you make conscious choices that are in line with what’s really important to you, the less you will struggle with what you can and cannot afford.”

[Related Link: 7 Signs You are Living Beyond Your Means]

Track to your goal every week.

A person who consciously aimed to spend just $20 less a week out would have more than $1,000 to show for their efforts in just one year. But without a firm commitment to free up the funds, you’ll never find them.

Instead of viewing savings as a sacrifice that takes away from your life, focus on whittling your way to a weekly savings goal; track your savings just as you would track your spending.

In the $20 example above, a person who opted to brown bag a lunch at work just one day a week, drank one less beer at happy hour, clustered errands to reduce fuel waste, and ironed their own work shirts versus dropping by the dry cleaners could easily hit a $20 a week savings goal.

Track your progress daily using a tool you can reference anytime and anywhere, like a budgeting application or personal budgeting software.

Related Link: How to Set a Goal in Mint.com]

Don’t discount the cost of risk.

Carrying debt is a common reason people postpone saving, and while there is financial truth that it will cost you more to pay double-digit interest on a debt balance when you’re lucky to make 1% interest on your savings, there is a cost to the risk of not having savings.

If you had a financial emergency and no cash, you’d have no choice but to turn to high interest credit cards and loans, or worse, foreclosing on your home, and even bankruptcy.

As a result, having emergency savings of at least three months of your salary should remain a priority. In the process, you can become more aggressive in your debt payoff strategy, too.

The obvious first step is to stop charging anything you can’t pay for in cash, but in today’s low interest rate environment, competitive balance transfer offers are also increasingly common.

If you have balances on high interest credit cards, seek balance transfer offers that allow you to transfer your debt to a lower interest rate card—and make sure you have a plan in place to maximize the amount of time the rate applies, to pay the balance down.

As your debt is reduced, shift the amount of money you were paying to loans, directly into your savings fund until you accumulate at least six months worth of your salary.

[Related Link: Are Credit Card Balance Transfers Right for Me?]

Make your money hard to get to.

Look for an interest bearing savings account with no minimum balance or fees that offers at least .80% on your money—and ditch the ATM card.

The harder it is to access your cash, the less tempted you’ll be to tap into your emergency fund for non-emergencies.

If your employer offers the option to split direct deposit of your paycheck, devote a specified amount directly to your savings account so you never even miss it.

[Related Link: The 4 Basic Financial Accounts Everyone Should Have]

Stephanie Taylor Christensen is a former financial services marketer based in Columbus, OH. The founder of Wellness On Less, she also writes on small business, consumer interest, wellness, career and personal finance topics.