Emergencies or unexpected events that require money can happen to everyone and usually happen when you least expect it. This is why having an emergency savings is so important. And the best way to build an emergency savings account is to pay yourself first.
Paying yourself first means treating your personal savings account like a priority bill. Don’t wait until your other bills have been paid. If you wait, there is a possibility that you will spend all of your extra money before you have time to deposit anything into savings.
At least 10% of your net income should be set aside for savings. The easiest way to do this is to have it directly deposited from your paycheck into your savings account. If you are able to save more than 10% of your net income, that is even better.
How do you save that much money?
Obviously, you are not going to save 3 to 6 months of living expenses overnight. Don’t let that be a deterrent for you though. Starting with small amounts that you save on a consistent (weekly, bi-weekly, monthly) basis will add up over time and help you meet your goal. Also, there may times during the year where you receive extra money – examples would be a tax refund or a year-end bonus. Consider allocating these funds into your emergency savings account.
Where should you keep your emergency savings?
Set up a separate emergency savings account that you don’t use on a regular basis. The more access you have, the easier it can be to use the money for other things. However, you don’t want to deposit the money in an account where it may be difficult to access the funds quickly and without unnecessary red-tape. Consider establishing a separate savings account at your local bank or credit union. And do not tap into those funds unless absolutely necessary.
Paying yourself first doesn’t mean that you reward yourself first. Sure, it’s fun to treat yourself to a new outfit or movie now and then, but these purchases should not take priority over your bills.
In summary, here are three important reasons to start saving now instead of waiting until next year (or the year after):
When you pay yourself first, you’re mentally establishing saving as a priority. You’re telling yourself that you are important. Building savings is a powerful motivator. It’s empowering.
- Paying yourself first encourages sound financial habits. Most people spend their money in the following order: bills, fun, saving. Not surprisingly, there’s usually little left over to put in the bank. But if you move saving up to the front, you’ll set the money aside before you find ways to spend it.
- By paying yourself first, you’re building a cash cushion for emergencies. Regular, steady contributions are an excellent way to build a nest egg. You can use the money to deal with the unexpected developments that life may bring. You can use savings to purchase a house, enjoy retirement, or achieve other financial goals.