No matter where you stand financially, it’s important to have an emergency fund in place. An emergency fund not only gives you peace-of-mind by allowing you to feel more prepared when unexpected expenses pop up, but it can also help you stay out of debt and avoid living paycheck to paycheck.

Knowing that you have money set aside for life’s unexpected expenses can be empowering and it’s the first and most crucial step to take when getting your finances in order. Financial experts recommend setting aside anywhere from 3 to 12 months’ worth of expenses with 6 months being a very common and feasible goal.

The idea of saving 6-months’ worth of expenses can sound like a daunting and time consuming task but it doesn’t have to be. This step-by-step guide will walk you through the process of improving your mindset and managing your cash flow in order to grow a large emergency fund that you can be comfortable with.

Step by step guide to saving money

Step 1: Set a Clear Goal

Your goal to save and beef up your emergency fund is one thing, but you’ll need to establish how much you plan to save and when you’d like to reach your target goal. It’s important to note that financial experts recommend that you pay off all your debt before saving heavily and building up your emergency fund. If you’re currently in debt, you may only want to start with a mini emergency fund of $1000 or $2000.

If you’re at the stage in your life where you can focus on building up your emergency fund to a solid amount, most people simply multiply their monthly income by 6 if their goal is to save 6 months’ worth of expenses. On the other hand, you can choose to add up monthly expenses as if you weren’t working. For example, if you quit or lost your job, you probably wouldn’t need that much money for fuel if you were commuting, work lunches and so on.

If you’re bringing home about $3,000/month but your bare bones expenses are only around $2,500 you might want to aim toward saving $15,000. I know that’s a lot of money to save, especially if you don’t bring home a salary even remotely close to six figures. But let’s use $15,000 as our goal example because it’s very possible to build up your emergency fund without taking 10 years to do so.

Establish a realistic target date to meet your goal so you can remain on track. Following our example above, if you wanted to save $15,000 in 2 years, you’d need to save $7,500/year or $625/month. And if you wanted to take 3 years to meet your goal, you’d be saving $5,000/year or $416/month. Does this still sound like a rough goal to meet or lot of money to come up with each month? Keep reading.

Step 2: Write Down all Your Expenses vs. Your Income

Once you’ve established your goal and projected target date, it’s time to write down all your expenses and freshen up your budget. Once you’ve included every expense, bills and payments, large or small, then subtract it from your monthly income. Do you have anything leftover? If you are living below your means, you should have something left over, but if it’s not enough to meet your goal, you can start doing a process of elimination to prioritize emergency savings.

When you prioritize your emergency fund savings each month, you’ll have to make other expenses less of a priority. This can mean becoming more energy efficient to reduce the cost of your utility bills, cutting your entertainment or food spending, shopping around for lower insurance rates, requesting a rate reduction on your credit cards, eliminating the use of your credit cards in general and so on. Take that one item or activity that you splurge on each month and reduce it or cut it out of your budget completely.

When you make subtle and drastic changes to your spending, the amount of money you are able to save will increase and you’ll be closer to meeting your goal.

Trimming the fat from your spending is one of the best ways to make room for additional savings goals. It’s also important to remember that building up your emergency fund will only be temporary and once you hit your goal you can always lower contributions to best fit your budget.

When you’re just getting started, the road may be tough sometimes and you’ll have to make some sacrifices but just imagine how great it will feel when you have to get extensive vehicle repairs and don’t even blink an eye because you have the money to take care of it. Imagine the peace-of-mind you’ll have when you have to take off from work for several days but don’t have to worry about dealing with a decrease in income that month thanks to your fully stocked emergency fund.

Step 3: Give Yourself a Raise

Step 3 can be pretty fun; that’s if you like to earn extra money. Instead of waiting around for your clients or employer to give you a raise, you can create your own raise to help meet the savings goal you set in step 1. While getting a temporary second job in order to build up your emergency fund is an option, it’s not the best one. If you already work a decent amount of hours each week, odds are you’re not going to want to stand around at another job on weekends or at night unless you’re doing something that interests you.

Turn a hobby you’re passionate about into a money-making side hustle by getting serious about your skills and abilities and marketing yourself. Do you like to walk dogs, tutor others or babysit? Can you bake, type well, write or design graphics? Whatever interests or hidden talents you have, you can certainly earn extra money from it. The best part is, earning extra money doesn’t have to be dreadful or boring, and you’ll be setting yourself up for financial success in the meantime.

Step 4: Use a High-Interest Account

Where you keep your emergency fund is just as important as it is to stay on track with monthly contributions. You’ll want your emergency fund to be in an account that’s easy to access should you ever need the money quickly. I’d also recommend using a high interest savings account. Most of these are with online banks, but they are still very secure and easy to use.

If your emergency money is meant to last, it makes sense to keep it in an account where the balance can earn daily interest instead of a regular savings account where you will literally earn pennies from your emergency fund each year.

I keep my emergency fund in an account with Capital One 360 and they offer a competitive APY of .75%. It’s super easy to set up an account and I also keep a checking account with them too because if I needed money from my emergency fund fast, all I’d have to do is transfer money from my savings to checking and I’d be able to instantly use my debit card with Capital One 360. There are plenty of other online banks that offer a high APY that is calculated daily so your emergency fund can earn extra money regularly. They include:

Step 5: Automate Savings

Between trimming the fat from your expenses and giving yourself a raise, you should be able to accumulate enough money to contribute to your emergency fund each month to stay on track. Your next step is to automate your saving’s contributions to ensure that you meet your goal.

Set up automatic transfers to deposit money to your account housing your emergency fund before you even get access to the money. Even if you are already prioritizing debt payments and other savings goals by paying yourself first, it’s crucial that you work on your emergency fund first until you get it to a comfortable amount.
Your emergency fund is your first line of defense to keep you from using credit cards and racking up more debt when emergencies occur. The future is unpredictable, so it’s best to be prepared.

Have you ever been intimidated by the thought of saving up 6 months’ worth of expenses? How do you plan on increasing your emergency fund to a comfortable amount? I hope this guide has helped and good luck on your savings goals for 2015!

Chonce Maddox

Chonce is a freelance writer who’s obsessed with frugality and passionate about helping others increase their savings rate, eliminate debt, and work toward financial stability. She chronicles her journey to becoming debt-free on her blog, mydebtepiphany.com.

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