Millennials & college students especially struggle with creating an emergency savings plan. What advice do you have for saving up those pennies to possibly save our lives later on?
The most important thing you can do is to make it automatic so that you don’t have to think about it.
If you leave it up to your own willpower to save manually “whenever you can” then you will never do it because it always feels better in the moment to spend the money on something you want than to save it for a rainy day.
Building up savings is a form of delayed gratification, which requires willpower. But the amount of willpower is dramatically reduced when you automate the process.
Here’s how to automate your emergency savings plan:
First, open an online savings account. These are the most convenient options for automated savings. I use CapitalOne 360.
Next, link it to your checking account (where your paycheck gets deposited).
Finally, Set up a recurring transfer between your checking account and your new online savings account.
I suggest syncing the timing of the transfer with your paycheck. So if you get paid biweekly, set up the transfer biweekly. This way, it just feels like you got a little less in your paycheck. You’ll adjust to this lower amount quickly.
The faster you want to grow your emergency savings, the larger your recurring transfer should be. You can always edit the recurring transfer and change the amount with a couple of clicks.
That’s it. Now, just let your savings account grow on autopilot.
You only have one job: Don’t withdraw money from the account unless it’s a real emergency.
If you deposit $100 biweekly and don’t touch it, you’ll have $2,600 and change (interest) by the end of year 1. By the end of year 5, even if you have to withdraw a couple thousand for emergencies, you’ll still have over $10,000 in savings.
This will not be the case if you decide to withdraw money to buy shoes or go on vacation every couple of months. Set up a separate fund for shoes and vacations. With CapitalOne 360, I can set up as many savings accounts as I want.
If you want to easily create a monthly budget that includes a line item for emergency savings, check out my personal monthly budget spreadsheet. You can download it for free and start using it today to improve your personal finances.
Featured image by Negative Space.
First published on Quora.