Step 4: Establish an Emergency Savings Fund

If you lost your job, would you be able to pay your bills for the next few months? If your car broke down, would you be able to pay for the repair without putting it on your credit card? Unexpected things happen, and for those living paycheck to paycheck, it can be hard to deal with them. They may find themselves skipping payments and risking utility shut-off, car repossession, and/or foreclosure or eviction from their home or charging things to credit cards, which only provides temporary relief. (After all, the credit cards need to be repaid.)

Establishing an emergency savings fund provides a cushion that allows you to pay for expenses should the unexpected occur. Financial experts recommend saving at least three to six months worth of essential living expenses. If you do not already have that amount in savings, determine how much you can set aside each month until you reach your goal. Since you don’t know when you will need the money, make sure that it is put in an account that is easily accessible and where there are no penalties for early withdrawal. A savings account is usually a good choice.

Saving is easier if you make it an automatic process. If you have direct deposit through work, you should be able to have a portion of your paycheck deposited into your savings account. Additionally, many financial institutions allow you to set up a periodic automatic transfer of funds from your checking account to your savings account.