It’s perhaps one of the most important practices American consumers can engage in, and arguably one of the hardest. A recent study by Bankrate.com found that 49% of Americans have not saved enough money to cover three months’ expenses should an emergency – job loss, unexpected medical expenses, or house or automotive disaster – occur.
More alarmingly, experts want consumers to have twice what fewer than half of Americans have saved—a minimum of six months’ expenses, but ideally nine months’ to a year’s worth. According to Bankrate.com, only 25% of Americans have saved six months’ worth.
Know What You Need
When it comes to savings, more money is better than less money. But making sure you have the right amount of money in mind as your goal, or making sure you’re saving enough, is key, said Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network.
”How much really is enough? ‘Enough’ depends on a person’s individual situation,” Gallegos said. “Think about the level of expense that makes you rush to a credit card. Is it a car repair bill for $250? A medical bill for $500? Have at least that amount available, and build toward six or more months’ living expenses.”
Play Mind Games
In tough economic times, it can be especially hard to set aside money that may be used for other things. But the best way for many to start can be to change their current mindset, said Karen Carlson, director of educational programs at nonprofit financial organization InCharge Debt Solutions.
”Saving money isn’t ‘sexy’,” she said. “It’s hard. It’s thought of as a limitation… The first thing I tell people is, don’t approach saving as a zero-sum game. When you diet, you don’t go cold turkey. If you cut your $75 monthly cable bill, replace it with a $10 monthly Netflix account (and save the rest.) It’s a compromise so it doesn’t seem that bad.”
Start Small
The idea of having a full six months’ expenses saved can seem daunting, and it may seem like an impossible task for someone who has a current savings account balance of $0. Starting a savings plan can be as simple as starting small, which Chicago-based CPA Kelley Long, national spokesperson for the Feed the Pig savings campaign, said is better than not starting at all.
”The total amount needed can be overwhelming,” Long said. “Six months worth of expenses is a lot of money for someone living paycheck to paycheck. Instead of thinking of the total amount, just start saving. $25 per month is better than nothing. And once you get into the habit of saving, you’ll find it easier to just keep adding.”
Find Extra Money
For consumers who don’t just have an extra $25 or $50 lying around to put into a savings account, small cuts can be made to begin the savings process in a way that won’t make lifestyle changes feel miserable, Carlson said.
”There are lots of things you can do to save money that will have no impact on your lifestyle,” she said. “Examine your insurance policies closely and check to see if you are overinsured. You might have overlapping auto and medical insurance, for example, that won’t do you any good. It’s not fun, but I went over my policies this year and save $150 per month. You can also start comparing costs of purchases, such as cell phone plans.”
Gallegos suggests beginning with getting rid of unneeded items through websites like eBay or Craigslist, or through a garage sale. Saving coins in a jar at the end of the day can also be helpful. Consumers should also treat unbudgeted extra money – such as a tax return, commission check, or a bonus – as money that can be saved.
”Sock away windfalls,” he said. “Make it a practice that whenever you earn or receive extra money, save rather than ‘blow’ the excess money. Make sure you have set up a budget. By stashing the extra, in addition to your regular pre-determined amount from your budget, you’ll see your savings soar.”
Know When Not to Save
Saving money is beneficial, but can sometimes be counterproductive for people who have mounting debt.
”If you are in debt, you should not be saving,” Carlson said. “I often see people paying 15- 16% interest on debt, and putting money into a savings account that yields 1% interest. It makes no sense.”
Gallegos agrees, and said setting priorities can save a lot of financial woe.
”Pay your mortgage first,” he said. “If you own a home, never risk it… If you lose your home in an emergency, you’ll be stuck with no income, no residence, possibly no equity, and all of your old bills. Pay down credit card debt next. For those who are weighed down with debt, especially credit card debt, and paying high interest rates, work on paying that debt off first. Few, if any, investments will return as much. Next, create an emergency fund. Ideally, budgeting will allow you to build a small emergency fund while paying down credit card debt. Understand, too, that paying down credit card and other debt is a way of creating a financial cushion.”
Pay Yourself First
For consumers who are in a financial position that allows them to prioritize savings rather than debt repayment, experts recommend making it as easy as possible by utilizing features such as direct deposit or direct transfer, treating the transfer as a bill.
”Pay yourself first,” Carlson said. “Direct deposit money into a savings account that is not linked to your checking account, so you never see it leave your account.”
Equaling out savings and other expenditures can also be a helpful tip, Gallegos said.
”Bill yourself,” he said. “When you pay off a credit card with a $50 monthly payment, increase your savings amount by that $50. With that same outflow you have today, you’ll be paying yourself.”
Know Yourself
For many, just spending less money but keeping it in a checking account is not the best way to save. It can simply be too tempting to spend the money if it’s there, which is why Carlson recommends opening up a savings account that is not tied to a checking account—and even more extreme measures, as necessary.
”If you’re tempted to spend the money, if you know you’ll be tempted to spend the money, put it in a different bank and don’t get a debit card for it,” she said. “That way you’ll have to physically talk to someone in a moment of weakness, and the urge to spend it might pass.”
Keep it Liquid
Emergency savings funds are not meant for taking risks with. Emergency savings funds are only good when they can be accessed as needed, and if they are invested, they are not as easily accessible—and may not pay off, said Matt Armstrong, certified financial planner with wealth management firm Savant Capital Management.
”Keep your emergency fund liquid, not in equities or bonds, in a high interest savings account at a bank or credit union, or a money market account through your bank or investment advisor’s custodian,” Armstrong said. “Your account should not be in stocks or equities due to those accounts being difficult to liquidate in a pinch and possible capital gains tax for selling equities to make cash available. You want to keep your emergency money in a place you can access it readily and without delay.”
That Gadget is Not an Emergency
As difficult as it may be to want something and to see that the money for it is just sitting in an account, treating non-emergency financial situations – such as wanting an iPad or new Louis Vuitton bag, but already spending your paycheck – as emergencies, is one of the worst mistakes one can make.
”An emergency that would constitute one dipping into their fund is of the direst circumstances—job loss, a life-threatening car accident, a natural disaster, etc.,” Long said. “Its purpose isn’t to be your cash cushion when you want something but don’t have the cash until next payday; it’s there to get you through times when your main source of income is gone for the foreseeable future. Your emergency fund is intended to help you pay your most basic bills, such as housing, utilities, and basic food, while you make the necessary changes to your new lifestyle and adjust to your new income. It should not be used for premium cable, smart phone data plans, dining out, new clothes, or anything beyond basic survival.”
Be Realistic
When savings accounts don’t build up as quickly or easily as one would like, it can be discouraging and make people wonder why they should even keep trying. But as long as people keep trying, they are getting ahead, Gallegos said.
”Take it slowly,” he said. “Rome wasn’t built in a day, and neither is an emergency fund. It’s easy to panic with a savings account in the low two-digit figures. Any action you take to establish an emergency fund will do you good.”
Carlson said she likes to offer hopeful words to her clients when they become discouraged.
”The best part of emergency savings funds,” she said, “is that you only have to build them up once.”
Follow Anna Schumann on Twitter at @ASchumannCMN,.
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