Stop Living Paycheck to Paycheck and Start Building an Emergency Fund

If you are one of the 25 million American households who live paycheck to paycheck, building an emergency fund may seem like an impossible task. Has payday finally arrived, but taking the family out for a nice meal or buying that new sofa you need has put your emergency fund once again on hold? This means your paycheck each week goes towards simply surviving.

If this is you, you are part of the 1/3 of Americans who live hand-to-mouth. To live like this is difficult, but you can break the hand-to-mouth cycle and start building an emergency fund. Here are a few tips to help you break the cycle.

Know Where Your Money Goes

The first steps to building an emergency fund are to know where you money goes. From the minute you get your next paycheck until you get the next one, write down everything you spend money on — from paying the electric bill to buying a cup of coffee on the way to work.

This will allow you to see where all of your money goes, how much you spent on priorities, and how much you spent on non-necessities. You may be surprised at how much money you have left at the end of a week when you avoid spending money on items you don’t need.

Create a Realistic Budget

A budget is a written plan that allows you to see how you should spend your money and how much you can put aside. The budget should be realistic, meaning you should use an accurate amount for incoming funds and outgoing expenses. For example, use only regular paycheck amounts. Do not include bonuses or extra income.

Add up all of your priority expenses, including living expenses (rent/mortgage, utilities, and groceries) and transportation expenses (gas, auto maintenance, and insurance). Deduct the total amount of your monthly expenses from the total of monthly income; the difference is the amount you should have left at the end of each month.

This will also allow you to visually see how much money you spend each month on non-necessities, which is money that you can use to build your emergency fund.

Spend Less & Save More

Regardless of your current financial situation, you always have a way to save. Whether at the grocery store, on home utilities, or even family activities, you have ways to spend less and save more. Keep in mind the less you spend, the more you will have to add to your emergency funds.

Paying down your debts is crucial when you try to save money. Whenever possible, pay double the minimum amount due on credit cards or personal loan payments. Once you have one debt paid off, move on to the next. Each time you pay off one debt, divide the amount of this payment in two and use 1/2 for another debt and 1/2 for your emergency fund.

Not paying your bills on time often results in late fees and increased interest rates. You can avoid this extra spending by paying bills on time. If you know that your payment is going to be late, contact the company’s billing department to ask about adjusting your payment date, which may help you avoid a late payment.

If you have multiple small debts, consider getting a personal loan or a title loan to pay them all off. Just keep in mind that these types of loans may have a shorter payback time limit than a credit card debt. However, this will allow you to have one payment and one interest rate as opposed to several.

Use your creativity to start saving money in other ways as well, such as cutting back on home energy use, carpooling, and buying used items whenever possible, such as clothing. Remember, every penny you save can go towards building your emergency fund.

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