Why you need to know this: If you ever lose your job, or find yourself in some sort of other financial emergency, you’ll need some cash to get you through the bad times.
Oh no, my very expensive laptop just did that black screen of death thing! Which isn’t surprising because it’s been, maybe, six years, and laptops have amazingly short lifespans (seriously, what’s up with that?). So now I’ll have to shell out $1,000 I wasn’t planning on spending, which is upsetting, because one of my freelance gigs just fell through, and I need to figure out how to make up that lost income.
This is a thing that has happened to me before, and I bet countless other people have gone through similar situations. It’s stressful! You know what makes it less stressful? Having an emergency fund to count on when you’re pressed for cash. Because our lives can change in an instant — we lose our jobs, our computers die, we get sick, our families need us to fly home due to an emergency — and the thing that can make that stressful instant more bearable is money to to get you by.
You don’t want your emergency fund to be a credit card because that is a one-way ticket to falling into a big black hole of never-ending debt. You don’t want your emergency fund to be your parents or your significant other or your best friend. That’s a pretty heavy burden to put on people you love, and you don’t want to ruin a relationship later because you’re fighting about money.
Saving is hard, yes, of course. People who know how to save and can amass six months worth of living expenses or more (which is generally what financial advisors suggest) are a very special breed. Because, as we know, the most common breed of people are those who never save and like to live beyond their means.
So if you are starting an emergency fund, I am not going to tell you to save six months worth of expenses. I am going to tell you to save $100. And once you do that, I am going to tell you to save $500. And if you can do that, I am going to tell you to save $1,000. And then I am not going to tell you how much you need to save anymore, because if you can save $1,000, you’ve learned to become that very special breed of person who knows how to save. You know how much your rent, utilities and groceries cost, so you’ll know how much you’ll need to fall back on when that dark day comes and your life changes in an instant.
Here’s how to get started:
Step One: Go on Bankrate.com to find a good interest-earning savings account. You can see if the bank you already use for checking also has a good savings account, but if you use a big bank, you probably won’t find something that will earn you a lot of interest.
Step Two: Open a savings account with a bank that offers a good interest rate, and has at least three stars in Bankrate’s Safe & Sound rating system. Also, you want an account that won’t charge you fees, and doesn’t require you to deposit a minimum amount. Two suggestions: ING DIRECT’s Orange Savings Account and Ally Bank — both are good options, and Ally Bank has a superior rating with Bankrate.
Step Three: Set up monthly automatic transfers from your checking account to your savings account. Because, let’s be real, it’s easier to save when you don’t have to remember to save. If you feel like you’re really tight on cash, start with $25 a month. Be reasonable about it. If you can save more, do it.
Step Four: Oh, look: You have an emergency savings! Don’t you dare withdraw any of this money unless it’s a financial emergency. This isn’t for buying birthday presents or going on vacation. Set up a separate savings account for those things. This account is for emergency purposes only.
Step Five: Keep saving. Even if you’ve saved more than your wildest dreams, the more you save, the more interest you earn, and the more prepared you’ll be for anything that comes your way.
Looking for more advice on how to save? Read this.