After receiving your paycheck each week or every other week, you might immediately allocate funds for various expenses, such as your mortgage or rent, auto loan payments, utilities, etc. But although it's important to ensure that your essential monthly expenses are covered, you shouldn't forget to feed your savings account.
According to a 2012 survey by Bankrate.com, approximately 28 percent of Americans do not have an emergency fund. Also called a "rainy day" fund, a cash cushion can be a godsend when you deal with unexpected expenses or a major financial crisis, such as a job loss. But even if you recognize the benefits of a rainy day fund, saving money is much easier said than done.
However, rather than push aside the idea of growing your emergency fund, here are five ways to reach this goal.
#1. Set a goal
Before you deposit one penny into an emergency fund, determine a goal -- in other words, what's the minimum you would like to save? Establishing a target amount can keep your savings goal on track. And while there's no magic number to set aside for emergencies, many financial experts recommend at least a three-month cushion. Of course, you shouldn't stop saving once you hit this goal. The more you have stashed away in your account, the easier it'll be to survive economic hardships.
#2. Open a savings account
There are several ways to save money, and some people prefer the "under mattress" or "shoebox" approach. To each his own. However, you might grow your fund faster with a savings account, particularly one that earns a higher interest rate.
A regular savings account with your bank is an excellent place to start, but you might consider other high-yield savings options as well. For example, you can open an online savings account or money market account with a low minimum opening deposit and earn a higher return on your money. Or you can look into certificate of deposits which are one of the safest investments strategies.
#3. Take 10% off the top
To take your rainy day fund to the next level, you have to treat your savings account like a bill. Don't wait until all your bills are paid and then deposit what's leftover. At this rate, you'll never increase your fund. For this to work, you need to transfer 10% of your paycheck into savings as soon as the money clears your account.
Understandably, this might not be realistic -- at least not yet. However, you should make a habit of transferring something into savings each pay period, perhaps 5% or 6% of your pay, and then gradually increase the amount as your income allows.
#4. Use automatic savings options offered by your bank
Speak with your bank or credit union and ask about options to jump start your savings. For example, with a Wells Fargo Way2Save savings account, the bank automatically deposits $1 from your checking account into your savings account each time you use the bank's debit card for purchases. Similarly, other banks offer roundup programs. The bank rounds up each purchase made with your debit card to the nearest dollar, and then deposits the difference into your savings account.
#5. Create another income source
Maybe your income doesn't afford the opportunity to save money. Rather than give up on the idea of a rainy day fund, think of ways to supplement your income, and then deposit any extra income into your savings account. You can get a part-time job, or start your own freelance or consulting business.
#6. Don't shop for an entire year
Other than buying groceries and other essentials, resolve to stop shopping for a year (or less depending on your savings goals). This includes the purchase of clothes, shoes, electronics, furniture and impulse buys. In addition, skip your annual vacation and plan a staycation instead. This approach increases your monthly disposable income, letting you build your rainy day fund faster.
#7. Live beneath your means
Some people start looking for new cars and houses after a pay raise. However, if you don't have much in the bank, pretend that your pay increase doesn't exist. Deposit this extra income into savings and continue to live off your old salary.
And if you're living paycheck-to-paycheck or at your max, downsizing and moving into a cheaper home can provide the cash you need to build your cash cushion.
#8. Reduce monthly expenditures
If you don't have extra cash for savings, maybe the problem isn't too little income, but too many expenses. Reevaluate your budget and look for ways to scale back. For example, if you're spending money on entertainment and recreation each month, perhaps you can reduce this amount by half (or more) and then deposit the savings into your account.
In addition, you can clip coupons or buy generic to save money on groceries. As far as your utilities, you might lower your monthly bills by adopting energy-efficient techniques, such as turning off lights when leaving a room, properly maintaining your HVAC system, and cooking with smaller appliances. And if you rarely have time for television, look into cheaper cable packages.
#9. Increase your contributions as you pay off debt
Do you have credit cards, auto loans and other types of loans? Once you pay off these creditors, take money you would ordinarily spend on these expenses and deposit the amount into your rainy day fund. This move can boost your savings efforts, helping you reach goals faster.
What do you feel is a good amount to have in a rainy day fund?
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