If you are living paycheck to paycheck is a very stressful situation an emergency fund is probably something you can’t imagine. I know from experience how that feels. There is pressure to have that paycheck arrive on time. If it is even a day late, there can be a great amount of chaos. In this type of setting, there is a feeling that you can’t breathe and there is no margin for error. Often times, the next paycheck is already spent before it comes in because bills are lined up and waiting in the queue.
The worst part about being paycheck to paycheck is when the unexpected expense comes along. This can be a car repair, or a trip to the doctor’s office, or an appliance that goes out and needs to be repaired or replaced. In addition to this short list, there can be so many other things that can go wrong. When this happens and there is only enough money for the basic needs, you don’t have anything left to handle a minor emergency like this.
If you are in the paycheck to paycheck situation, you probably can’t fathom how to get started setting money set aside for an emergency fund. When there is barely enough money to cover expenses, it doesn’t sound realistic. It is especially difficult if the line of bills and future expenses is greater than what the next paycheck is going to bring home.
Where to get started?
The first thing to do if you want to build an emergency fund is to set a target. The target should be an amount of money that you want to set aside to cover an emergency that comes up that isn’t part of the normal expenses. It should be something that would cover a minor emergency such as one of the things listed above. It should be something set aside in a savings account that you can get to quickly in order to take care of the situation.
Most of the minor emergencies that we will deal with are under $1,000. That being said, it seems that this is a good place to start. Ideally in the future you would probably like to have more to cover a larger emergency, but we can start here. Having this amount set aside will provide quite a bit of relief in the event something comes up. Just knowing that you can cover something that costs that amount of money will provide some much needed margin in your finances.
Putting Money in the Emergency Fund
Now that you have a target amount, the work begins. You can realize the peace that an emergency fund will bring, and you have an amount, but you have to find money to put in there. The first thing to do is create a manageable budget. If you haven’t done this before, you are in for some work. In short, you need to identify income and expenses. This will show a surplus or a shortage and if you are paycheck to paycheck, you’re likely to find a shortage.
Once you have the numbers in place, assuming there is a shortage, you need to look at two things. In order to create a surplus that you can use to build an emergency fund, you have to remove expenses, or create more income. It is simple in theory, but harder in practice. This might mean cutting out dining out, or trimming the food budget and eating more simple. It also might mean turning off cable TV for a bit. But is it worth it to have margin in your finances?
Now that you have a target amount, and you have created a budget, and found money to work with, it is time to start. Whatever amount you were able to set aside after creating a budget, needs to be calculated per paycheck. If you planned a monthly budget, and figured the amount you could save was $300 per month, you need figure that out per paycheck. Most are paid weekly or bi-weekly so do the math and figure out how much of your paycheck is going to the emergency fund.
At this point, it is an expense just like anything else in your budget. You have assigned an amount of your paycheck to this fund, and after the tithe, this amount needs to head to a savings account. It is always good to set this money aside first, before spending takes place. Once the money starts to get spent, it makes it harder and harder to put that money aside.
Seeing it Through
The more you are able to set aside each paycheck, the faster you can get to $1,000 in your emergency fund. This is common sense, but I mention it because things may come up while you are building the fund up. So ideally, the faster you can get to that target amount, the better. This just means that even though you have a set amount, you can always try to set more aside. This could happen with a little extra income, or possibly selling something to move to your goal a little faster.
Stay discipline throughout the process. You may be tempted to save less at some point on the way there, but don’t give in to that temptation. If you keep thinking of the peace of mind that will come from having money set aside for a small emergency, that can drive you and keep you disciplined.
Reaching The Goal
When you finally get to that point and have the emergency fund built, it’s a good feeling. Now you can breathe a little bit and you can handle that car repair when it comes up. You can handle a situation without having to use a credit card, or having to feel stressed out. And if the emergency comes up and you have to use some of the money, you have the discipline and the margin in your budget to replace that money and build the emergency fund back up.
In addition, you now know that you can create margin in your finances and set money aside. If you are struggling with debt such as a credit card, or a student loan, or some other kind of debt, you can start working through the debt snowball. You have the margin, you have discipline, and you have the emergency fund. Keep moving on and attack that debt.