Day-to-day expenses add up quickly, and many Americans find themselves living from paycheck to paycheck with nothing left for savings at the end of the month. But failing to create a rainy day fund can turn a minor emergency like a car repair into a major financial crisis. Here’s why it’s vital to save, plus tips for getting into the habit.
The Importance of Savings
The absence of savings may not make a big impact in your everyday life, but it hurts badly when unexpected expenses arise. If you take a trip to the emergency room, your home needs urgent repairs or your pet needs surgery, you’ll have to figure out how to cover the emergency expense while still paying your regular bills. And if you lose your job, it’s important to have a cushion to cover expenses until you find a new one.
In these situations, people without savings frequently resort to credit cards. This is an option, but if you can’t pay the balance in full each month you could get stuck with hefty interest charges.
Financial planners generally recommend having at least three to six months of after-tax income saved. Whether you need a few hundred dollars for a medical bill or a few thousand after a layoff, having the cash available can protect you from financial pitfalls. And the safest place to stash your rainy day fund is in a savings account at a financial institution like Alliance Credit Union, where it earns returns.
To find a way to save, take a close look at your incoming and outgoing cash.
Start a budget by writing down household income and every critical monthly expense, such as groceries, utilities and housing payments. Subtract those expenses from income to reveal your disposable income. At this point, decide how much to save each month. If what you save isn’t adequate, cut back optional expenses temporarily to save more. Once your emergency fund gets big enough, you can save a little less.
Saving gets easier when it’s routine. Consider setting a monthly reminder to transfer a set amount of money from checking to savings. Alternatively, you may be able to set up automatic transfers. Adopting a saving habit will reduce the pain and produce quick results.
If you don’t have enough saved, get to work on saving now so a small emergency doesn’t leave you in dire straits.
Emily Starbuck Crone, NerdWallet