When you’re living from paycheck to paycheck something like saving money is the last thing on your mind but it should be one of your biggest priorities. Living from pay to pay means that you either don’t have any spare room for emergencies or you spend way too much money (and you have other problems). I have always struggled with saving money and to be honest I’m still not great at it. But at least now I do it and I have a bit of an emergency cussion.
How I did it
For me the issue wasn’t setting aside money into a separate account, that’s easy to do, the issue was about not spending the money. I needed to be able to set the money aside without immediate access to the funds. Initially I had a savings account set up but with a bank debit card attached to it I was constantly dipping into the money when I ran out.
The key for me was that I needed to set the money aside without being able to access the funds directly. The solution was simple, set up an automated deposit into an account that could accumulate funds and not be easy to withdrawal. In my case i used a mutual fund that I make regular contributions to (standard index fund).
This isn’t the only option so you’ll have to find one that works but essentially the money is there in case I need it but it isn’t something that I can draw on at a moments notice.
The other thing that i did was that I aligned the withdrawals from my checking account to match up to my pay. Essentially these are funds that are drawn out on the day I get my pay which means its gone before I have a chance to spend it.
Why it works
The solution is pretty simple – it works because the money is drawn out before I can spend it on anything and when a spur of the moment purchase comes up the funds are much harder to get at than say money in a savings account. It doesn’t mean that my money is locked in, I can pull it out and I have when I really needed it but its not a 30 second transaction that can happen in the store.
That’s the beauty of this setup and why I wrote about it in my post about Keeping on top of your finances. It effectively forces you to set aside some money.
How to set it up
The best way to set this up is to go to your bank and set up a special account with them (this will change depending on your bank), ask the banker to draw the funds directly out of your account. Its a very straightforward thing for them to do and they’ll likely do it for free.
Now were you put the money is up to you – I have my savings going into an index fund and I haven’t really benefited with the markets just floating along. A financial advisor will help you put the money into a place where it can serve its purpose and potentially gain some interest.
Will it work for you?
As long as you set it up it will work. You don’t need to start it very high, just get used to the idea that you’ll have less funds available to get by. Essentially you are paying yourself first! By putting the funds into an account that is not quite as accessible you can build a good little emergency fund. Remember even $50 per pay will add up $1,200 in a year (if you get paid twice a month) which is a good start for an emergency fund.