A savings plan for your emergency fund

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Last week, I listed a few questions to ask yourself to help you decide how much money to hold in your emergency fund. Hopefully, the questions have helped you seriously think about your emergency fund and discuss it with others as needed.

The next step is to put a savings plan into action. Don’t worry if you still don’t have an exact amount set for your emergency fund; whether your goal ends up being $5,000 or $10,000, you should start saving today. Of course, you should create a specific goal for your emergency fund eventually. 

First, you’ll need to determine how much money you have available to save. Don’t just pick a number: if it’s too much, you’ll struggle to save enough every month and may get discouraged. If it’s too little, you won’t save as efficiently as possible. I suggest using a cash flow analysis and budget to calculate a monthly savings goal.

A cash flow analysis monitors your income and expenses in a specific period of time (in this case, a month). You can do this by reviewing statements, receipts, and pay stubs from the previous month. During this process, be sure to include literally every expense and regular form of income. By subtracting what you spent from the money you made, you’ll have an estimate of your monthly net income.

Next, create a budget using the expense and income numbers you recorded in your cash flow analysis. Your budget should list specific numbers for necessary fixed expenses (rent/mortgage, debt repayments) and realistic estimated costs for necessary variable expenses (groceries, utilities, gas).

Leave room in your budget for unnecessary expenses: costs related to entertainment, dining out, subscriptions, and cable TV, for example. (This is a good time to review your cash flow: do you spend an exorbitant amount of your income on unnecessary expenses?) Try to create a plan that you can stick to, but one that also encourages you to be smarter with your money.

Hopefully after all that, you’ll have some money left over! Unless you plan on funding other financial goals most of this leftover money should be put into your emergency fund. I suggest most instead of all because your variable expenses on your budget are just estimates. You may find that you legitimately need more money than you budgeted for to cover things like groceries and gas. Give yourself a little leeway for these kind of estimation errors.

Once you know how much you can afford to save every month, you should decide where to save it. Generally, an emergency fund is best kept in a savings account. Because you don’ t know how much money you’ll need in an emergency or when that emergency will happen, you don’t want to risk losing the money in an investment, and you’ll also want to make it easily accessible. A savings account may not offer much in form of a return, but your emergency fund isn’t meant to be an investment, anyway.

Before you open a new account, make sure you are aware of any associated fees. Many banks will waive some or all monthly fees (such as maintenance fees) if you have a certain amount of money in the account. If you won’t reach that minimum amount right away or soon after opening it, it might be best to find another bank.

Once you have a plan to save and a place to save, it’s time to start saving! Perhaps the best way is to set up automated savings. Your bank should be able to set up a regular, automated transfer from your checking account to the savings account holding your emergency fund. Similarly, if you have your paycheck directly deposited into your checking account, your employer may be able to deposit some of your pay into your savings account every pay period.

As I wrote last week: personal finance is personal. The strategies laid out for saving in this article may not be the best strategy for you. However, hopefully it’s given you ideas for creating your own savings plan, and encouraged you to start saving for your emergency fund  — or whatever your financial goal may be.

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