Even the most airtight budget can be caught off guard by unexpected expenses. What do you do when you’re hit with a large bill that needs to be paid immediately? Setting up a savings account and contributing to it regularly can save you a lot of worry down the road.
If you’re not sure how to start budgeting, a 50/20/30 budget may help. It provides a simple framework for your spending: 50% of your earnings should go toward essential expenses like rent and utilities, 20% should go into savings, and the remaining 30% can be used for personal expenses like going out on the town.
With 20% of your paycheck going into a savings account, you won’t be tempted to spend it on other expenses. It can remain safe and separate from the account you use on a daily basis, and you can access it in case of unexpected expenses. As an added benefit, money in your savings account will grow slowly but surely over time.
What should come out of savings?
What constitutes an unexpected expense is different for everyone, but here are some common ones that you may want to pull from your savings account. Note that these are expenses that need to be paid immediately due to an unforeseen circumstance:
- Unexpected medical bills
- Sudden car repair
- Emergency pet surgeries
- Urgent home repairs
- Shattered phone screen repair
- Travel for a family emergency
How much savings should I have?
Think about the following scenario: if you were to lose your job tomorrow, would you have the financial footing to stay afloat? How long would you be able to afford rent, utilities and food before your money would run out? Factoring in the job hunt, interviews and waiting to hear back, securing a new source of income can take quite a while.
That’s why the general advice is for your savings account to hold three to six months worth of expenses. You can easily calculate this amount by looking back at your budget for the last few months. You probably know your monthly rent off the top of your head, but how much did utilities add up to? What about groceries? Once you’ve added them all up, that total is how much you should aim for in your savings account.
What else should I know about savings?
No matter how much you put away each month, consistency is the key. Making savings a habit paves a solid foundation for your future finances. To learn how people manage their savings, Ashwin Khurana from Mint visited Indianapolis, IN to chat with people on the street. Check it out!