The Steps to Building an Emergency Fund

Building an emergency fund is one of the most important things you can do for your finances. It can literally mean the difference between complete financial devastation and being prepared with a workable plan to build a sustainable bridge for your household budget.

Financial experts often tell consumers to have an emergency fund but few tell you exactly how to create and maintain one. However, next to getting out of debt, nothing is more valuable for your financial future. Here a few steps you need to consider as you look to build an emergency fund for your household.

Start Small

Building an emergency fund can seem like an insurmountable mountain to climb. It is doable, however, even on an extremely small budget. The key is to start small. If you are only able to put aside $10 a week, do it. In fact, that $10 will build up to $520 in a year’s time. What looked like measly pocket change can turn into a big chunk of change in a short time.

The goal early on in this process is not as much the amount, as it is to just start the process and develop the habit. As you make other cuts in other areas or raises roll in from work, you can increase this amount later. At this point, sit down and figure out what you can reasonably afford each week at this point in time.

Automatic Deduction

Let’s face it: even the most self-disciplined person in the world would be tempted by unused cash sitting in their bank account. That’s why it’s important for the amount you determine, big or small, that goes towards your emergency fund be taken out each week without question. Do it before you pay your bills or go grocery shopping. Even better, set up a payroll deduction that automatically goes into a savings account for your emergency fund. You will not miss the money, but it will be waiting for you when you need it.

Reduce Expenses and Save the Extras

Do a thorough examination of your budget. Chances are, if you look very hard at each place you spend money each week, you will find one or several places you can eliminate or greatly reduce your expenses. Don’t just let that money slip into a budget black hole. Take the extra money and apply it to your emergency fund.

Pay Your Debt…Even After It Is Paid Off

Getting out of debt is an important part of good financial health. While putting a small amount towards an emergency fund is still important, you should focus most of your financial effort on getting out of debt. When your focus is there, it will be reduced much more quickly.

When the debt is finally is paid off, don’t stop! If you were spending $300 a month towards debt, transfer that same amount to your emergency fund once your debt is completely paid off. It is all too easy to funnel that money into another expense once the debt is gone. Resist that temptation and focus your efforts on your emergency fund until you get it at a level you wish.

Set a Lofty, Achievable Goal

You will get as many suggestions of what an ideal amount for an emergency fund should be as people you ask. But the general rule of thumb for your long term goal for the fund should be at least 3 months worth of your income. Even better would be 6 months or 12 months of your income. However, in the beginning a small goal is best. Once all of your debts are paid off, a loftier goal is in order.

Setting up an emergency fund can be done even on the smallest of incomes and budgets. With a little dedication, even in the midst of debt, an emergency fund can be set up and easily maintained. By setting small goals and gradually increasing them, an emergency fund is achievable.

Biggest Budget Blunders: Keeping the Pulse on Your Financial Goals

Setting up a budget can be a bit of a complicated process when you don’t follow the correct steps. Last time we talked about the proper steps to set up a budget that works best for you and your household. Now, we will examine a few pitfalls you want to avoid. By eliminating these common budget blunders, your budget will give you the financial boost you need.

Not Practicing Your Budget Faithfully

While this principle might seem obvious, it is also one that is sure to sabotage your budget. A few dollars here and a few dollars there which are not budgeted for add up to a great deal of money over time. This is money you should have a designated spot for in your budget that you are neglecting. This will spell trouble in the long term for your budgeting goals. Make a plan for each and every dollar that enters and leaves your home and follow it religiously.

Not Putting Money Aside for Emergencies

It might seem impossible to have income each month that does nothing but sit in the bank, but it is an integral part of any personal budget. If you don’t have it, you are just one job loss or illness away from complete financial ruin.

Most financial experts agree you should attempt to save between three and six months’ worth of living expenses in a savings account to which you have immediate access. For the self-employed or those who work in a high turnover industry, you emergency fund should be closer to a year’s worth of expenses.

Buying on Impulse Instead of Checking the Pulse of Your Budget

Impulse buying is one sure way to destroy any progress you’ve made on your financial goals. Yet, this type of buying can be difficult to cut out until you figure out what impulse buying is and what buying purely based on need is. Instead, make a rule that you will only buy things that are on your list before you enter a store. Or, you will only purchase an item online after you have given yourself 24 hours to think about it and examine your budget .

While impulse buying might seem to only apply to the larger items in your life, the same principle applies to small items like buying a coffee every morning before work or a shopping spree at your favorite mall after a bad day at work. The simple way to stop impulse buying is to never buy anything that is not budgeted for.

Cut Out All Fun Things

If your budget does not allow for anything “fun,” it will almost certainly fail. Why? No one can adhere to something that does not allow for entertainment and fun. That’s why it’s important, both financially and mentally, to have some space in your budget focused purely on your enjoyment. Even if the amount is small, it will go a long way to help maintain your budget.

Pay Only the Minimum on Credit Cards

While completely paying off your credit cards may not be a reality for years to come, gradually paying down your debt is a goal you can achieve each and every month. That will not happen, however, if you only pay the minimum payments on your credit cards. In fact, making only the minimum monthly payments will cost you thousands in interest fees that could otherwise be applied toward savings or something else your family wants or needs.

Budgets are a valuable tool to help you reach your financial goal. There are, however, several obstacles that can completely derail your budget if you are not careful. Be mindful of your budget in all of your purchases and you will be well on your way to budgeting success.

6 Steps to Creating a Budget

The word “budget” is often met with resistance and avoidance. However, a budget can be the single best tool to make the most impact on reducing your spending and stretching your dollar further than you thought possible. With a budget in place, your money has a purpose and gives you boundaries when it comes to your spending.

There are several steps to follow when building a budget that works for you and your family.

Step One: Gather All Financial Statements for X-ray Analysis

The more financial information you have on your past spending history, the better. This includes bank statements, investment accounts, utility bills, credit card statements, and any other information that helps you get a clear picture of how much you spend each month.

Step Two: Examine All Income Sources

Closely examine all of your forms of income over the previous year expected to be recurring and record those. Be sure to include extra income other than just your regular paycheck. This would include interest payments and any other outside income. If you have a year’s worth of these records, you are able to get a full picture of your annual income. Divide this amount by twelve for your average monthly income.

Step Three: Prescribe a List of Monthly Expenses

Create a list of all the expenses you anticipate each month. These would include items like mortgage payments, car payments, auto insurance, groceries, utilities, retirement savings, and anything else you spend money on regularly. For assistance and a clear idea of what you spend each month, refer to the financial statements gathered in step one.

Step Four: Extract Expenses into Two Categories: Fixed and Variable

Your fixed costs are expenses that stay relatively the same from month to month. These would include house payments, car payments, utilities, and anything else that is a recurring regular expense. These expenses are essential and are not an optional expense.

Variable expenses are things that change from month to month. These can be things like food, gas, eating out, entertainment, and gift giving. Some of these items are optional (like entertainment) and others are not (like food). These are the items will allow you to make adjustments in your budget.

Step Five: Diagnose Monthly Expenses: Income or Monthly Expenses

Figuring out exactly how much you are earning each month, as well as how much you are spending will give you a clear picture of your financial situation. If you are spending more each month than your income, drastic cuts in nonessential areas are in order for a successful budget.

If, however, your monthly income is greater than your expenditures, you are off to a great start. You will then determine which area of your budget is the biggest priority, such as credit card debt, retirement savings, or a building up an emergency fund. This is where you will funnel your excess money each month. The ultimate goal in this exercise is to make your income and expenses equal each month.

Step Six: Give Your Budget a Regular Checkup

A budget is a process and not an ending point. As your life changes, so will your expenses and income. It is important to review your budget regularly to make sure the income/expenditure areas are still equal. If one area of your budget seems to exceed your allotted amount, make an adjustment. This means allowing more money in one area while taking money out of another area. Particularly with a new budget, even a monthly review is crucial to build a successful budget.

Creating a budget does not have to be a difficult process. With a thorough examination of your financial situation, both what you are bringing in each month, as well as spending, you can set up a budget that works for you and your family.