Emergency funds, short-term savings, vacation funds -- there are a lot of worthy short-term savings goals you might be considering. Use this quick guide to navigate how much you need to save, how to prioritize it, and where to save it.
If a major expense came up unexpectedly, how would you cover it?
Maybe it's August, you live in Texas, and your air conditioner just gave out. Or you've just been relocated to a job 30 miles from home, and your car needs new tires...yesterday. Sometimes we're faced with these sorts of expenses that need to be handled right away, but how do you budget for them? On top of that, there's this thing called an emergency fund that you know you need.
How do you find a starting point to work toward these goals, and how do you know how much to save? Budgeting for irregular expenses isn't so complicated. Use the following quick guide to get up and running (in other words, saving) as soon as possible.
1. How much do you spend each month?
Your savings exists to cover you in the event of an emergency or unexpected expense, but how much money do you need to save?
The way to figure it out is by looking at your monthly expenses. Use the last three to six months to get averages for what you spend on things like housing, food, utilities, gas, and other bills. Add them up to find out about how much you spend each month.
If it sounds too time-consuming to dig up your statements, consider a personal finance tool like Pageonce or Mint, which consolidate your accounts (and spending history) for you.
2. Create a cushion
Saving only the bare minimum in monthly expenses isn't a safe bet, though. Consider a job loss. What extra expenses might you incur if you were job hunting? The Wall Street Journal lists the following (tax-deductible) expenses often associated with a job search:
- Employment agency or headhunter fees
- Travel costs
- Resume preparation
- Photocopies, postage, and long-distance calls
What if you carpooled to work, but now must take your own vehicle to copy shops and interviews? Job hunting isn't cheap! Add a little extra to your monthly expense figure to offset some of these costs.
3. Multiply to get your target number
Take your new, padded monthly figure and multiply it by three to six, if you have other sources of income, or by six to 12 or more, if you want to play it safe or have dependents for whom you're responsible.
Now you know how much money needs to go into your emergency fund savings account. Defining your goal is half the battle!
4. List your short-term goals
What's your five-year plan? Do you want to renovate the kitchen, buy a vacation home, go to Thailand, or save up to decorate your baby's nursery?
Write down your goals, and take time to figure out how much cash you'll need to realize each one.
5. Commit to a contribution
Your emergency fund is the most important savings goal on the list. Figure out how much you can contribute each month, and automate the money transfers so you won't miss a single month. Once you've hit your emergency fund goal, start socking away cash toward your short-term goals.
6. Choose a savings account
Emergency funds need to be liquid, since you might need the money quickly and unexpectedly. You also want it to be a safe and secure investment that is guaranteed by the Federal Deposit Insurance Corporation (FDIC), which insures deposits in banks and thrift institutions for at least $250,000 per depositor. In other words, the stock market is a bad place to put your emergency fund! Here are some better options:
- Traditional savings accounts
- High interest savings accounts
- Money market accounts
- Certificates of deposit (CDs)
For a short-term goal that's still a few years away, a certificate of deposit (CD) might be a good option for money you're confident you won't need unexpectedly. Pick the type of account that is best suited to your goals. Once you've narrowed it down, compare savings rates to get the best return on your investment.
7. Get started!
Finally, the most important step is to actually get started! Take a personal finance day if needed, but get on the road to financial stability. Bonus tip: Automate your savings. Money is automatically transferred to your account on a specified day, and your savings grows through regular contributions and the magic of compound interest. You'll be on a beach in Thailand before you know it.