The thought of trying to figure out how to set up an emergency fund and calculate how much money to save feels like a lot of work.
Break through the overwhelm by simply starting somewhere. Increase the amount of money you want to save later. Instead of regretting you haven’t started your emergency fund, put a stake in the sand and make progress by taking a few simple steps.
One quick note to I should mention. I’m not a financial planning professional. I’m sharing what’s working for me as part of my investing strategy. Always do your own research and consider your own circumstances before making any financial decisions. You could also check with your favorite financial professional to understand what would be best for your situation.
Start an emergency fund in 3 simple steps
Instead of getting hung up on setting a huge goal, start with something smaller. Once you setup your accounts and automate your savings plan, you can increase the amount you want to save per paycheck later.
Ultimately you’ll want to calculate your monthly expenses, set a savings goal, and calculate how much to save each paycheck. Instead of getting completely hung up on figuring out a 6 month emergency fund and not taking action, setting up a smaller goal will get you started.
1. Setup a separate savings account
The goal is to put money aside so it is easy to get to but not too easy. A separate account helps you see how much money you specifically set aside for your emergency fund as well keep it safe from accidental spending. The money you’re saving should be for real emergency.
And since this money will hopefully be set aside for a long time, you’ll want to find an account that pays a higher interest rate than your local bank. Earning a little passive income from your savings is a nice bonus.
Check out accounts such as Capital One 360 (previously INGDirect), Ally, and Marcus by Goldman Sachs to name a few that you can set up quickly online. Capital One and Ally both have checking accounts available that to make it easier to spend the money if you need to.
2, Choose your initial savings amount per paycheck
If you’re paid every other week you’ll receive 26 paychecks per year. You can do some simple math to set a yearly goal as a starting point.
Ideally you’ll want to save enough money to cover several months of your expenses, but make progress by starting somewhere.
For example, saving $25 per paycheck will result in $650 saved for the year. While this may not sound like a lot of money, it’s something. It’s a starting point.
If you can spare $40 from each paycheck, you’ll save a little more than a $1,000 for the year.
Pick a number to start. You’ll come back in the future when you have more time to focus on setting a goal for your full emergency fund.
3. Put your savings plan on autopilot with direct deposit
Have you heard of the saying “pay yourself first”? The concept means putting money into a savings account before doing anything else with your paycheck. Your employer probably allows you to split your paycheck in at least 2 accounts.
Go back to the account you just setup and copy the bank account number and routing number. Enter this information into your direct deposit instructions along with the amount you want to save per check.
Make sure you set this instruction as one of the first ones on the paycheck split list. Your emergency fund is an important goal and should be treated as such.
Wrapping up starting your emergency fund in a few simple steps
Don’t let overwhelm and burnout get in the way of starting and achieving your savings goals. You can start your emergency fund in a few simple steps and then increase your savings goal later.
By breaking down the actions into steps, it’s easier to get started instead of procrastinating. We’ve all been there. Don’t have regrets later.
Take action today by opening a new account, setting a simple per check savings goal, and updating your direct deposit information.
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