8/20/2012 2:15 PM ET|
Why you need $500 in the bank
Having a few hundred bucks at the right times in your life can make all the difference. Here's how to tuck away money for emergencies, even if you don't have much.
Wendi Pendleton was living pretty much paycheck to paycheck when she read one of my columns telling people they need $500 in the bank.
Having a big emergency fund is great, I wrote, but all you need to get started on a better financial future is a $500 pad. That's enough to avoid bounce fees, steer clear of payday lenders and cover most minor emergencies so you don't have to add to your credit card debt.
"I decided it was solid advice and trimmed my spending that month and saved $500," Wendi wrote me. "Realizing how much money I wasted, I saved another $500 the next month, and so on."
Some months Wendi saved even more. Unexpected dental work and a car repair, events that would have stressed her out in the past, didn't derail her.
"I now have $12,000 in savings I am using as a down payment on my first house, something I never thought would be possible for me on my own," Wendi wrote from Riverside, Calif. "Thank you. You changed the way I looked at my money and spending, and improved the quality of my life."
Most of the talk about financial cushions centers on the importance of an emergency fund, that stash of cash that's supposed to equal three to six months' worth of expenses. But that's an awfully tough standard for most families to meet.
A $500 pad, by contrast, is something that just about everyone can scrape together with enough determination. And it can change your life.
3 steps to a $500 cushion
1. Start by keeping an extra $100 in your checking account. If you maintain this pad and resist the urge to spend it, you'll greatly reduce your chances of bouncing a check. (You also should sign up for overdraft protection, to minimize the damage if you do accidentally write a check that's too big for your balance.)
Some MSN Money commenters -- the ones who actually balance their checkbooks -- write themselves phony checks for their "pad" amount to keep them from spending it. If you keep track of your balance online or via an ATM, you'll have to mentally deduct the $100.
2. Then funnel $400 into your savings account. It may not seem like much, but $400 will cover a good chunk of the real emergencies that come your way, from car repairs to insurance deductibles to replacing an appliance that breaks down. Even if an unexpected expense is higher than $400, you'll at least reduce the amount you need to scrape up from other sources.
3. Then leave it alone unless you're facing a real emergency. If you're in credit card debt or owe money to payday lenders, you must get out of the habit of looking for a quick fix when you encounter unexpected expenses.
The pain of taking money out of savings may help you look for alternatives to spending the cash. If the spending is absolutely necessary, you're better off paying cash than paying interest on money borrowed from credit cards or payday lenders. Then you can concentrate on rebuilding your cushion as soon as possible.
The first $500 is the hardest
Eventually, you should try to build your pad of cash into a real emergency fund, although that can come after you've taken care of more-pressing financial needs, such as paying off high-rate debt and saving for retirement.
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