Mellody's Mail: Emergency Savings Fund
— -- QUESTION: A few weeks back on "Good Morning America" you gave a tip about putting $5 away then doubling it every payday. Would you please explain this so we can do it and how much it's expected to save over a year? We are both 45 years old and have some savings. My spouse has a 401(k) at work putting in the max and the company matches at 6 percent.
ANSWER: Your question is directly related to the tip I gave regarding an emergency savings account. I cannot overstate how important this topic is, so I appreciate your e-mail!
An emergency savings fund is not something that can be created overnight. It takes time, careful planning and commitment. The first step is to understand where your income is going each month, which will not only help you figure out how much you can regularly save, but will also help you determine your total emergency savings goal. Once you calculate how much you can save each month, add this amount to your monthly "expense list" (i.e., think of it as you would any other bill).
To ensure you remain committed to paying this "bill" each month, you may want to consider having the money automatically deducted from your checking account and deposited into a savings vehicle, such as a money market account. When trying to build an emergency savings account, do not be tempted to remove money from your 401(k) plan or reduce your contributions. It is important to ensure your budget contains room for both types of savings.
With regards to where you can squeeze the $5 from your budget, one of the best places to start is with your afternoon lunch. Simply packing a lunch prior to work is an efficient way to save easy money. Additionally, forgoing a daily purchase of bottled water or an expensive coffee is another way to reach the $5 goal. And, if you are able to put away $5 a day, five days a week for the next 20 years, you will have saved $26,000!
The best place to put these funds as you grow your emergency savings account is in a money market fund -- an investment vehicle offered by a brokerage firm or mutual fund company. You want to avoid the mattress or cookie jar or anywhere too tempting to tap. Money in money market funds is invested in highly liquid, safe, investment options like U.S. Treasury bonds.
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