This is part of our series A Guide to Jumpstarting Your Life Goals.
The basics for saving money:
- Developing and maintaining a budget
- Saving for retirement in your company’s 401(k) plan
- Opening and funding a savings account for emergencies
- Opening and funding a side savings account for planned spending (vacation, major purchases, quarterly tax payments, etc.)
- Having a zero-balance credit card for emergencies
It’s common sense that everyone needs an emergency fund—or at least an available credit card with a zero balance as a last-resort style emergency fund.
No one wants to call their parents, lean on a wealthy buddy, or depend on a side hustle (or get into credit card debt) each time they encounter a surprise car problem or medical bill.
Read more: Make a Budget With These 5 Steps
Before you can stock your emergency fund, though, you’ll need to develop a budget—a list of your monthly income and expenses—and find a place in that budget where you can shave off a fraction for your savings account. Make it an amount you can live without and, if you’re paid regularly, automate transfers from your checking account into your savings.
If you feel you lack discipline, set up an external savings account at an outside (online) bank—if you’re tempted to get at this money for non-emergency reasons, the fact that the transfers take time and that you have to log in to an additional financial institution to access the cash may help curb your temptations.
How much of an emergency fund you need varies. Some financial experts say that if you work full-time on salary and have a partner doing the same, you should aim for two to three months’ worth of living expenses. If you’re a single freelancer who needs funds both for emergencies and as temporary float while you await slow-paying clients, a four- or six-month cushion is ideal.
But emergency funds aren’t just buzz-kills concocted by financial planners—they have a second purpose. Building up a basic savings account is also indicates financial responsibility to potential lenders. That means it’s particularly good financial practice when you’re planning to apply for leases or loans for cars, education, or housing.
Homework: Make a budget or start using a money-tracking tool to figure out where your money is going. Many credit card companies and banks provide a spending analysis at year-end—so that’s a great snapshot to start.