Editorial Policy

How to save when it's never worked before

Miranda Marquit

October 16, 2014

Do you find yourself at $0 at the end of every month? Does the thought of an unexpected cost worry you? You aren't alone.

A June 2014 Bankrate survey shows that 26 percent of Americans have no emergency savings, while another 24 percent have less than three months' worth of expenses saved. That means half of Americans aren't ready for a financial difficulty.

If you want a better handle on your finances and increased peace of mind, you need a rainy day fund. This is no easy feat when you are living paycheck to paycheck, but it is possible. The first step is to take stock of your expenses.

“People who are living paycheck to paycheck need to get a grasp on where their money is going,” says Michael Solari, a certified financial planner and the principal of Solari Financial Planning. Too many people just spend, without really thinking about what they are spending money on. “Once you see where your money is going, you might be able to cut back on things you don't need,” says Solari.

He recommends identifying big expenses, such as cable TV, and replacing them with lower-cost services. Solari points out that you can still get your entertainment with Netflix and Hulu for a fraction of the cost of cable, but you don't have to pay nearly as much as you would with cable — as long as you have Internet service. Besides, how many channels do you really watch, anyway?

We looked at the Bureau of Labor Statistics' 2013 breakdown of what Americans spend their income on and found that 10 percent of our income goes to eating out and entertainment alone. If you make $3,500 a month, and you only spend 5 percent of your income on eating out and entertainment, you can put $175 into savings each month. That's more than $2,000 in a year.

Once you know how much money you've been wasting, and where it's disappearing to, it's time to recover that money and put it to good use. Lee Gimpel, a consumer credit educator and the co-developer of The Good Credit Game, has five helpful tips for creating your rainy day fund:

  1. Start small and be SMART: Gimpel points out that you need to be able to measure your progress, and you have to start with something manageable. While you know you might be wasting $175 each month, chances are that you can't just suddenly start putting that money aside. Start with a small amount of money. “Make a goal that's Specific, Measureable, Actionable, Realistic and Time-bound,” or SMART, says Gimpel. “A better goal is to save $50 of each paycheck for the next year.” Once you get comfortable, you can level up to a higher monthly amount.
  2. Pay into the fund first: You should be paying yourself first. But how many of us actually do it? Gimpel says to make it a priority, even if you have to start small. “On payday, make it a habit to pay into your rainy day fund first. If you wait until the end of the month, that extra $20 or $50 might easily have already gone to something else.”
  3. Contribute automatically: To make it even easier to start your fund, make it automatic. “Use a separate account for your emergency fund,” says Gimpel. Most employers will allow you to direct deposit a portion of your paycheck to a savings account. Even if you can't set up an automatic transfer, move the money from your checking account to your emergency fund once a month. Automatically figure it in your personal finance software or checkbook register each month so you know that money's already spoken for.
  4. Get an image in your mind: “Behavioral economics studies show that people do better when they put an image with a goal,” says Gimpel. “Use a broken-down car or something similar to remind you of the tangible benefits of a rainy day account.” This will keep you motivated during times you want to just give up on building your emergency fund.
  5. Make it hard to get to: Finally, make sure that it's not easy to access your savings. While you still need some liquidity, the reality is that you want your fund somewhere that requires you to give your emergency a second thought. An “emergency” trip to Vegas with your friends doesn't count, and you don't really “need” to replace your broken TV within the week. “Don't put your rainy day fund in a drawer or jar at home where you can easily take it,” says Gimpel.