We recently asked “What Do You Consider a Financial Disaster?” It is an incredibly personal question and one that some of us really don’t want to think about. We are all working so hard to be financially smart and responsible. We don’t want to think about something wiping us out!
I wonder, though, if for many people reading sites like this one and searching for personal finance advice, the reality isn’t just that we don’t want to think about scary things. I wonder if for most readers the reality is that a financial disaster isn’t that far off. In today’s economy and job market most of us are living paycheck to paycheck. Every penny we earn goes right back out. For us, a financial disaster is a lingering cold that keeps us from working. The idea of investing or, heck, even setting up and putting money into an emergency fund is a pipe dream.
But what if it didn’t have to be? What if I told you that—with some careful budgeting and, yes, some extra work, you could have a pretty hefty emergency fund within six months to a year?
Yes. Really. Here’s how you do it.
1. Start with your budget
Don’t try to manage your numbers in your head. Putting them all down on paper gives you a concrete list which is incredibly helpful, especially if you are prone to forgetting about payments or automatic withdrawals. If you’ve never written out your budget, don’t worry, it isn’t hard. Websites such as Mint.com, BankingSense.com, or DaveRamsay.com offer plenty of budgeting tips.
2. Inflate Your Numbers by at least 10%
It’s okay if this makes you hyperventilate but trust me here. If you aim to bring in more than you need to spend you’ll automatically have money to funnel into an emergency fund. Plus, if you add 10% to each of your bills and monthly expenses guess what happens:
You’ll pay down your debts faster. This will create wiggle room in your budget and allow you to increase the amount you funnel into savings over time.
When you budget more than you actually need for something like a utility payment, you won’t panic if your utility bill is a little bit higher some months than others. You can make this even less stressful by basing your utility bill budget line on last year’s highest bill + 10%.
3. Start Saving Now
Right now. Toss some money in there. Even if it’s $5, that’s $5 more than was there ten minutes ago and that creates momentum!
Then, as your bills come in and you find yourself with “extra money” (thanks to that extra 10% you budgeted), put whatever “extra” money that was allocated for that bill into your savings account.
4. Use the Envelope Method for Nebulous Expenses
It will be tempting to roll over money that you might not spend one month into the next month. Don’t. Instead, use the envelope method for these expenses and then, at the end of the month, if there’s any money left in the envelope, put it into your savings account.
5. Find Ways to Bring in More Cash
I don’t necessarily mean going out and getting another part time job. I’m talking about gigging. Gigging is a great way to earn extra money here and there in whatever free time you have. It won’t earn you tons of cash but every little bit helps, right?
Understand that, no matter how simple these tips seem, they will be hard to do every day. Old habits die hard and your circumstances might be particularly dire. Still, any little bit that you can save is a little bit more peace of mind when it comes to figuring out how to handle a future financial disaster.