Setting up an Emergency Fund
Step 1: Decide How Much You Need
A good first goal is $500. This amount might get you through an emergency expense or at least make an important first payment towards it. Break your goal into a weekly savings target. If you goal is $500, set aside $10 per week. It will take you 12 months to reach your goal. If you want to reach it in 6 months, set aside $20 per week. After you reach that goal, you can make your next savings goal higher.
Step 2: Plan Where You Are Going to Put It
The easiest place to stash your emergency cash is in a savings account that is linked to your checking account. First, you want instant access to that money in the event that you need to pay for an emergency expense. You also want to make deposits easy, and having a linked account will accomplish that task.
Step 3: Re-examine your Budget
Use a "Cash Flow Budget" worksheet to begin to track your income and expenses for a few months. In doing so, you might find some available cash that you can put towards your emergency fund.
Step 4: Don’t Think About It
You might think that it is just too hard to save money. After you have tracked your income and spending for a few months, decide on a dollar amount and set up an automatic transfer from your checking account to a savings account to take place once a month. By automating it you won't have to think about it and chances are, you won't miss the cash that's being moved!
Step 5: Gift, What Gift?
You may be fortunate to receive unanticipated money for a holiday or birthday, a bonus at work, or even a tax refund that is higher than expected. Since you haven't accounted for that money in your "mental budget," take advantage of that surprise and deposit it into your emergency fund. You will be that much closer to attaining your goal!
Step 6: Celebrate!
Now, this is not the time to spend your hard-earned savings on a fancy meal or vacation, but it is important to recognize all the work you have done to establish your emergency fund. Do something small but fun for yourself or your household to celebrate your success.