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Frugal Family: Create an Emergency Fund

Tighten your purse strings to stash some cash for a rainy day.

When times are tight, it's very hard for many people to save money. However, during these tight times is when many experts say it's most Important to save for a rainy day. 

"When an emergency comes up, if you don’t have an emergency fund, the first thing that will be cut from your budget is your debt repayment," says Leo Babauta, father of six and writer of Zen Habits. "You’ll use your credit card to pay for the emergency, and then you’re deeper in the hole. An emergency fund stops the need to use credit to pay for emergency expenses."

The three key steps are to 1) Stop creating debt, 2) Create a $1,000 emergency fund, and then finally, 3) increase that $1000 to the three to six months of living expenses that most experts recommend we all have available in savings in case of medical emergency, job loss, or other unplanned catastrophies.

But how, when finances are already tight, can one make room in the budget to create an "emergency fund?" Here are some tips.  They're mostly common sense ideas, but we can all use a little reminding once in a while.

1. Start small, and use automatic paycheck deductions if available. There's something to the old cliche, "out of sight, out of mind."  If you can arrange to have some money, even if it's just $25 per paycheck, automatically deposited into a savings or money market account, it will start to add up.

2. Treat it as a bill. If automatic deposit doesn't work for you, try adding it to your list of monthly bills. When you sit down to write checks for utilities, rent or mortgage, etc., write your check to savings, as well.

3. Round up. Some banks have accounts available that "round up" your purchases to the nearest dollar and put the extra change into a savings account for you. If this option isn't available at your bank, do it on your own. The dollars will add up quickly.

4. When debts are repaid, continue paying them, to yourself. If you finish paying off a car, your child moves from private to public school, or you finish off another loan, continue making the monthly payments; just make them into your savings account instead. It shouldn't affect your bottom line, but your savings will quickly increase.

5. Remember that small changes can make a big difference. Ordering water instead of soda in a restaurant saves around $2 or $3, per person. This can make a huge dent in your bill. Skip appetizers and desserts and save even more. Have you grown accustomed to your $4 latte every morning? Make it at home, or just pick it up once or twice a week, and watch your savings grow. Small sacrifices can definitely make for big savings in the long run.

Jennifer Burrell July 20, 2011 at 12:20 PM
We use the Way to Save program at Wells Fargo. It's amazing how quickly the dollars add up! Many banks pay a higher interest rate on these types of accounts than regular savings accounts, too.

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