Every adult needs an emergency fund. An emergency fund, or “rainy-day fund,” gives you a financial cushion to handle emergencies like car repairs or your pet’s surgery without going into debt (and paying boatloads of interest in the long term).
Here are three tips to start building a few months’ worth of savings:
Give up one luxury for a month
Building a cash cushion may seem impossible with a small paycheck, but saving even ten dollars a week can add up over time. You may not want to sacrifice a luxury like daily lattes or expensive nights out forever. Alternatively, forgo them for a short period and channel the extra cash into an emergency fund. Then, next month, you can switch your luxury expense to something else.
While modest, the amount of money you save can be the difference between paying for groceries in cash and putting them on your credit card, which will cost you more money through interest.
Start making money on the side
One way to take the pressure off a small paycheck and increase your savings is to pick up extra work outside your regular job. This might be selling items online or driving for a rideshare company. Ideally, it should be flexible so you can commit more or less time to it, depending on your needs. Any money you earn can be deposited into your emergency fund.
Keep it close… but not too close
One of the most important aspects of your rainy-day fund is where you keep it. If your fund is lumped up in your checking account or sitting in your wallet in the form of cash, it can be too easy to spend.
A rainy-day fund should be easy to access for emergencies, but not so easy that you dip into it for everyday expenses. Perhaps the best option is to add it to a Sky-High savings account, where you’ll earn a higher savings rate.
Be sure you resist the urge to withdraw those funds on a whim. An emergency fund is just that, only for emergencies. Hopefully, you’ll never need it if you plan and budget right.
How much should you save
Start with a goal of $1,000. Eventually, you’ll want at least three months of expenses in your emergency fund. Depending on your job and situation, some professional financial advisors recommend saving up to six months’ worth of expenses, but it’s ultimately your decision. Three months is a good cushion, but six is even safer.