You are on your way! Last week, you tackled your first challenge on budgeting. Today, we move on to creating an emergency savings.
Remember, this journey is designed to teach you to manage, grow and protect your money. An important part of that is making sure you have enough cash set aside in case of an emergency. Many Americans don't. According to a survey by PNC Financial Services, more than a third of the respondents, ages 36 to 60, said they had nothing saved for an emergency.
The last thing you want is to be hit with unexpected car repairs or medical bills and no way to pay for them, other than credit.
By following the challenge below, you'll learn how much you should have in an emergency fund, how to build it up and where to keep it.
The size of your emergency savings is dependent on your monthly expenses and whether you are married or have kids.
Three months of living expenses may work for someone without children or if you have short- and long-term disability through your job, which pays a portion of your salary if you are laid up. However, if you think you'll have a hard time finding a new job if you are laid off, are caring for elderly parents or if you have kids, you should try to save at least six months' worth of expenses.
To determine the amount needed, look at your budget and add up the cost of necessities, as well as any debt you have to repay. Multiply your expenses by the number of months you want the emergency fund to cover.
10 ways to save
Start small by skipping things you don't need, like going out to dinner.
Cut back on the cash in your no-interest checking account. Instead, if you typically have a balance after you pay your monthly bills, put some of that leftover cash into something that will earn you interest, such as a high-yield savings or money market account.
Treat your emergency fund like a bill you have to pay each month.
Put any bonus money, like a bonus or tax refund, into the emergency fund.
Make it a family affair. If you have kids, ask them to contribute some of their allowance. Once the savings goal has been reached, reward them with something like an outing to the movies or an amusement park.
After you've reached your goal, you need to check every year to see if your expenses have increased. If so, you'll want to up your emergency fund.
"Do not save what is left after spending; instead, spend what is left after saving." — Warren Buffett
One option is choosing among internet banks, which typically give you a higher interest rate than traditional savings banks. While you can't withdraw funds from an ATM, you can transfer money directly into your checking account.
You can also look into money market bank accounts, certificates of deposit (CDs) and Roth IRAs.
The bottom line
Two down, six more to go. Congratulations! You are one step closer to achieving financial wellness.