6 Tips to Help 20-Somethings Save for a Rainy Day
Pretty much by definition, when it hits, you won't have seen it coming: You could lose your job; or perhaps the car you that gets you to work will suddenly require a massive cash outlay for repairs; or you might suffer an injury or serious illness that leaves you paying the giant deductible on your health insurance;.
If your current plan is to patch the hole an emergency might make in your budget with a credit card, think twice: Doing so could leave you with debt spiraling out of control due to hefty interest rates. The smart thing is to have an emergency fund available, large enough to cover at least a few months' worth of living expenses (food, rent, insurance payments, utilities, gas money, etc.). Those who are risk-averse or whose career choices mean it could take them a long time to land a job might want to sock away as much as nine months' or even a year's worth of living expenses.
Here are some tips to get started:
1. Get a realistic sense of what your life costs. Start keeping track of your income and expenses so that if worst comes to worst, you know exactly what financial obligations you have month to month.
2. Separate your emergency savings from your everyday savings. If you keep your emergency money in a too-accessible place, you might be tempted to tap it for non-emergencies. Bank accounts, short-term CDs, or money market funds make sense, even though they won't deliver much in interest. Don't keep it in a long-term CD or the stock market, though. Long-term CDs will levy penalties if you need to withdraw funds early, and stocks can plunge in the short run (though stock in healthy companies tends to rise over the long haul).
3. Make it fun. Few people enjoy socking money away for a rainy day, but you could make it fun -- which might even deliver better results. You might, for example, make a contest of it with friends or family members in similar circumstances. You could race to see who meets certain milestones first, for example (such as saving $1,000 or $5,000 or $10,000). Or over a fixed period of time, you might see who can accumulate the most money. If no one wants to play, you might still motivate yourself by reporting on your goal and progress on a social platform, such as Facebook (FB).
4. Be creative. Consider "outside the box" methods to help you fund your emergency savings. Common (and effective) ideas include getting a second job -- which might only be needed for a year or two, at most. But there are ways to make extra money, anything from selling stuff on Craigslist to recycling to quitting smoking.
5. Automate it. A good way to build your fund is via automatic transfers from your bank account into your emergency account. Many employers offer the option of splitting up your direct deposit, allowing you to automatically route a set sum from each paycheck into your emergency fund account.
6. Never stop saving. This last tip might make the biggest difference in your financial life: Once your emergency fund is fully stocked, don't stop saving! Keep up your good habits and start plowing that extra money into retirement accounts. It might seem premature to do so when you're in your 20s, but it's not. You have a lot of what older folks can never get back: time. Even small sums can grow huge if they're left to grow for decades. At 25, you have a whopping 40 years of compound growth to enjoy before you're 65. And the power of that can be a beautiful thing: Just ask Miss USA Erin Brady.
You can set yourself up for a less stressful and more financially comfortable life by establishing an emergency fund now -- and then moving on to retirement savings.
Motley Fool contributor Selena Maranjian, whom you can follow on Twitter, holds shares of Netflix. The Motley Fool recommends Facebook and Netflix. The Motley Fool owns shares of Facebook and Netflix.