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How a Little Bit of Savings Goes a Long Way

Friday, January 20, 2017   (0 Comments)
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USnews.com 01/20/17

 

When you're living paycheck to paycheck, the idea of building an emergency fund seems impossible. After all, experts recommend squirreling away three to six month's worth of living expenses in a savings account. How can a newbie saver even get started?

Here's the good news: It doesn't take thousands of dollars to build a small, yet effective financial safety net. In fact, a little bit of savings goes a long way when it comes to weathering certain financial upsets, according to analysis from the Urban Institute, a nonprofit focused on elevating the debate on social and economic policy.

"This was a surprising result to us," says Signe-Mary McKernan, co-director of the Opportunity and Ownership Initiative and an economist at the Urban Institute. "Even $250 to $750 can help families in an emergency."

The Urban Institute found that families with as little as $250 to $749 in savings are "less likely to be evicted, miss a housing or utility payment, or receive public benefits after a job loss, health issue or large income drop." When families can rely on a savings cushion, even if it's not a large one, they may avoid taking on a payday loan, missing a bill payment or leaning on another less-than-ideal financing vehicle after disaster strikes. "With a little bit of savings, you can head into a virtuous cycle of asset-building instead of [a] downward spiral," McKernan says.

And even wealthier families shouldn't shrug off the importance of nonretirement savings. While income disruptions tend to hit low-income families hardest, "middle-income and higher-income families and their communities are not immune," according to the study.

So, if you're looking to start building a savings account – and sleep better at night – you can start small to make a major impact. Here's how to grow that initial financial cushion.

Make it automatic. The key to kicking off your savings strategy is to simply automate the deposits into a savings account, no matter how small they are. "For all income levels, you want to get into automatic savings vehicles," McKernan says.

Try to set aside a small amount each month, even if you have minimal wiggle room in your paycheck. "It could be as little as 2 percent of your income," McKernan says.

Your bank or payroll office should be able to automatically earmark a certain percentage of your income for your savings account each month.

Or consider trying to save money the old-fashioned way, says Ellen Siegel, a certified financial planner practitioner with Legacy Wealth Management in Miami. Empty coins from your purse or pockets into a change jar at the end of every day. You may find that you save a few hundred dollars in a few months with minimal effort. Deposit those coins in a bank account that you only touch in emergency situations.

Take on a part-time gig. If you're looking to build a small financial cushion, fast-track your progress by taking on a part-time job and funneling that extra income straight into your emergency savings account. "Moonlight at something else," Siegel says. "There are so many things you can do for cash and put that money away – petsit, teach piano lessons, tutor in Spanish, begin to think how would you generate revenue."

Or consider getting that initial savings account funded with a garage sale. Make time to sell your vintage belongings on eBay or Craigslist. A few good sales should give you enough to fund your initial savings cushion. Or save your tax refund. Save your annual bonus check. Don't spend those cash influxes until you sock away that few hundred dollars into a savings account.

Build on your success. Funding a $750 savings account doesn't just fortify your financial safety net, it teaches you the skills needed to fully fund an emergency savings account, save for long-term financial goals and meet other money milestones. "At the end of the day, if you’re able to save, it means you’re living beneath your means," says Jamie Ebersole, a certified financial planner in Wellesley Hills, Massachusetts. "Getting into the mindset really helps ... build good habits in the future."

Take those good financial habits and roll them into bigger, better goals. Finally fund that emergency account. Grow your retirement savings. Save money for college. Don't stop at $750.

"People think of savings and wealth as this kind of foreign topic," McKernan says. "It's not just money in the bank, it's insurance against tough times, it's insurance to get a better education, savings to retire on, a springboard up into the middle and higher classes. Wealth is what translates into opportunity."


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