The most important thing you can do to make your personal economy strong is to have an umbrella—an emergency fund with enough money in it to pay all your bills for six months. And it needs to be safe and secure in a bank account.
You read that right—half a year’s income! Wait. You can’t imagine being able to save even 50 bucks? No worries. The secret to getting there is to start small. Like $50. Now it’s time to figure out where and how to do this—how to come up with this seed money to start growing your emergency fund.
10 Percent Off the Top
As you get paid, save 10 percent of your paycheck, right off the top before you do one other thing with that paycheck. Can’t do it? I’m sure you can, but OK. Start with 5 percent or even 1 percent and build up from there. Make feeding your emergency fund the very first bill you pay, before anything else. It is a mandatory obligation to yourself.
Once you have accumulated $50, go to your bank or credit union and open a savings account. Or open a free savings account at my absolute favorite place to grow and maintain an emergency fund, SmartyPig.com, or at an online bank like Ally.
While you are opening that account, set up an automatic deposit authorization. This will give your bank authorization to automatically transfer the amount you designate—$10, $100, or another amount—from your checking account straight to your emergency fund on the exact day you specify.
Here’s a secret: You won’t miss what you don’t see in the first place. OK, you’ll miss it for the first few paychecks, but soon you really will not miss it.
Get Rid of Nonessentials
Give up the little things such as cable TV, eating out, gym memberships, and that landline phone you have, but never use. That’s a start; you’ll know instinctively how to add to this list. Immediately redirect those monies to your emergency fund.
Cut Variable Expenses
You can’t cut off your utilities, stop eating, or give up driving. But you can reduce the cost of the food, energy, and fuel you buy. Opt for the cheapest supermarket and gas station. Turn out the lights; turn down the thermostat. Stop the mindless short trips. Every little bit counts—it all adds up!
Take a look through your cupboards and closets. Identify everything you haven’t used in the past six months. Turn what you don’t need into cash using a website like eBay or Craigslist. Or hold a yard sale. Add every nickel of the proceeds to your emergency fund savings.
Make It Yourself
Start cooking and baking. Even if you aren’t cooking from scratch, making meals at home will chop your food costs. Whatever it takes, find ways to stop the endless money-drain you’re forking out on food. For example, a decent loaf of bread now costs upwards of $5.00 at the supermarket or bakery. You can make it yourself for $.50 a loaf. That’s just one example.
Stop sending more money than required each month to your credit card companies, mortgage lender, or any other creditors. It’s admirable that you’re being diligent in repaying the debts, but if you continue to do this while living without money in the bank, you’re setting yourself up to fall even deeper into debt.
How does that work? Think about it. Something is going to happen that you did not see coming, let alone plan for. How will you cover the cost of a new refrigerator when yours suddenly gives up the ghost? I could make a list a yard long of all the things that could happen to require you to fork over $50, $500, or more. What will you do if you have spent every dollar to your name in a mad rush to pay down debt, rather than having created a contingency fund?
Your emergency fund is your financial lifesaver—especially while you are in debt and living paycheck to paycheck.
Let’s say you save up $75. Great start! Then, wham! Your car suffers a blowout; the tire is shot. A new one will run you $200, but the tire shop sells certified used tires for $50 each. See how this works? Instead of putting another $200 on your credit card—leaving you defeated and certain you will never see financial freedom—you pay cash from your Emergency Fund for the $50 tire. Then you immediately begin to replenish and get back on track with growing your emergency fund.
With your current financial situation, you really can put yourself in charge of your finances. You are not a victim. You’re a money manager, learning the ropes, gaining experience, destined to be the CEO of your life. And a mighty fine CEO you will be!