For many of us, setting up an emergency savings account to protect ourselves and our loved ones can feel daunting.
With the right mindset and preparation, however, the task might not be as difficult as you may fear. In fact, these five simple steps can help put you on the path to a more financially secure future — no matter what obstacles life may throw your way.
1. Set money goals that align with your values
What do you want your life to look like a year from now? How about 10 years from now, or 30? Maybe you want to buy a house, start a business, send your kids to college, travel, or go back to school yourself. And then there’s always that dream retirement to work toward.
As you set and prioritize your short- and long-term goals, it’s important to ensure those objectives align with your values. So, take time to write out what you believe to be your core values. This process may seem basic at first, but you may be surprised by how much more cohesive and concrete your views become as you document them.
Next, do the same for your money goals, and then compare the two lists. There will likely be points in which there is synergy, and other areas where there is less alignment. Still, taking this sort of inventory of your values and goals could be a huge help as you implement the next four steps.
2. Track your spending for a month
Keeping a daily money log for one month can help you determine if any of your current spending is out of alignment with your values and goals. If you find that your spending habits are keeping you from reaching your goals, you might, for example, cut the cable cord ($1,200 per year1), dine out less often ($3,300 per year2), or cancel subscriptions to gaming services, beauty boxes, or fitness apps.
3. Start small with an automatic savings strategy
Once you’ve created some wiggle room in your budget, call your bank or credit union to set up a regularly occurring payday deposit from your checking account to your savings account. Not only do small regular deposits add up to substantial savings over time and prevent your financial goals from getting lost in the shuffle, but by taking the mental and physical effort out of the savings equation you are eliminating the temptation to skip deposits.
4. Boost your debt payments by 20%
Every dollar put toward a credit card minimum balance or car payment is a dollar that can’t be saved toward making other important goals a reality. The good news? Exceeding your minimum monthly payment by even a small amount can substantially decrease the time necessary to get a loan balance off your books. For example, paying just 20% more each month on a $5,000 balance — which is to say, by a mere $23 per month — could reduce your payoff time by nine months.3 Now imagine what you could accomplish with double that amount.
For each loan you pay off, take a portion of that monthly payment — or all of it, if possible — and add it to another debt’s monthly payment. This “debt avalanche” strategy is one of the best methods debtors can use to get out of debt.
The important thing, however, is to be proactive and do what you can right now to begin the process.
5. Save for unexpected windfalls
An annual tax return or employee bonus can go a long way toward boosting an emergency savings account. Consider setting aside a portion of each windfall — say, 50% — and using the remainder for something fun. (You earned it, after all.)
Ultimately the average worker will want to save between two and 12 months’ worth of living expenses, but if you’re in an industry more vulnerable to layoffs, furloughs, or other potential instability, building a more substantial cushion is obviously preferable.
Don’t let the unexpected derail your pursuit of prosperity or happiness. A well-funded emergency savings account, lower monthly debt balances, and a plan built from the values and goals most important to you can serve as a sturdy foundation for a bright financial future — no matter what life throws at you.
3 Assumes a $5000 loan with a 5% APR. Monthly required payment is $115. New payment with 20% extra is $138.