Build your first $500 emergency fund the smart way
Skipping your daily coffee isn’t going to cut it. To save your first $500 — a solid start on an emergency fund — try changing your mindset instead of just eliminating little luxuries.
1 Why $500, and Why Mindset Matters
Here’s a hint: Skipping your daily coffee isn’t going to cut it.
Little luxuries are a popular punching bag for financial gurus, but they’re usually not what really keeps you from reaching financial goals. Instead of eliminating lattes to save that first $500 — and beyond — try changing your mindset.
Why $500? It can be a solid start to building an emergency fund. It might not seem like much, but that amount can keep a car repair or an unexpected medical expense from going on your credit card.
NerdWallet gathered perspectives from a financial planner, a blogger and a writer and strategist on how to get started.
» Want the basics? Here’s what you need to know about emergency funds
2 Change the Way You Think About Saving
It’s tough to save when that means saying no to things you want (or could really, really use).
Stop looking at it as savings. Start looking at it as purchasing more freedom, flexibility and choice for yourself in your life.
“Most people tend not to save because they feel like it means delaying gratification or sacrificing something now for some future benefit, and that’s really hard for anyone to do,” says Eric Roberge, certified financial planner and founder of Beyond Your Hammock, a Boston-based financial planning firm.
Roberge suggests a perspective shift. “Stop looking at it as savings. Start looking at it as purchasing more freedom, flexibility and choice for yourself in your life,” he says. “The more you save, the more freedom you buy to use in your life when you want to leverage it.”
While $500 is a smaller goal, it’s also specific, which Roberge says is helpful. “If you just say you want ‘more money,’ then you’ll never have enough,” he says. “That’s a moving goal post.”
3 ‘Grow the Gap’
Financial blogger Paula Pant started seriously saving while earning $21,000 as a newspaper reporter. Back then, Pant, the founder of AffordAnything.com, didn’t have many places to economize. “At a certain point,” she says, “especially if you’re lower income, you just can’t cut any further.”
To build her savings, Pant turned to freelance writing. She used the money to travel and, eventually, buy real estate and quit her 9-to-5.
Writing — or freelancing — might not be your thing, but there are other ways to make money alongside a full-time job. You can dogsit for Rover.com, for example, or rent out your car when you’re not using it with Getaround.
Or maybe there are ways you can cut back on spending. If so, Pant suggests focusing on three main areas: housing, transportation and food.
“It’s easy to point the finger at things like getting a manicure,” she says. “But the reality is that if you get a manicure once a month and it costs $20, I can tell you exactly how much you’ll save.” For real savings, she says, keep the manicures and downsize your home: “You’ll save a lot more money.”
Either way, you’ll want to increase the difference between what you earn and what you spend — or “grow the gap,” as Pant says.
4 Make It Automatic
So you’ve decided to save, and you’ve found space in your budget. Next, make it habitual. That’s the approach writer and strategist Erika Sabalvoro takes.
“I found that the most effective way to pinch some money for an emergency fund is by treating it as a bill to pay,” she says. “It was a bill, billed by my future self to my current self.”
Many banks and credit unions offer automatic savings transfers, making it easy to move money on a schedule you choose. But most savings rates are low; the national average is just 0.09%. Picking a high-yield savings account with an annual percentage yield closer to 2% will help your balance grow faster.
Sabalvoro says she started by putting aside $35 here and there, and increased the amount as her circumstances changed. If she has money left over at the end of the month, she’ll add that to her “take care” fund, too. She says she uses this term, rather than “emergency fund,” because she sees the money as an all-purpose buffer that gives her choices, say, to leave a bad job.
But sometimes it comes in handy for actual emergencies. Sabalvoro recently sent multiple months’ worth of rent checks at once to avoid late fees and online payment costs. She asked for them to be cashed as they came due, but her landlord cashed them all at once.
“I thought, oh gosh, good thing I got it covered. It was really helpful,” Sabalvoro says of her savings.
Like Sabalvoro, you might find that your emergency fund picks up steam once you’ve made space in your budget, but getting started is the most important thing. You never know when you’ll need to dip into your savings — the only sure thing is that you will.
The article How to Save $500 originally appeared on NerdWallet.
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Frequently Asked Questions
Why aim to save $500 first?
Saving $500 can be a solid start to building an emergency fund. It might not seem like much, but that amount can keep a car repair or an unexpected medical expense from going on your credit card. Because $500 is a smaller, specific goal, financial planner Eric Roberge says it’s easier to reach than a vague target like “more money,” which he calls a moving goal post.
Do I need to cut out small luxuries like daily coffee to save?
Not necessarily. Little luxuries are a popular punching bag for financial gurus, but they’re usually not what really keeps you from reaching financial goals. Blogger Paula Pant notes that a $20 monthly manicure saves little; for real savings, look at bigger areas like housing, transportation and food. Instead of eliminating lattes, the article suggests changing your mindset about saving.
What does it mean to ‘grow the gap’?
“Grow the gap,” a phrase from financial blogger Paula Pant, means increasing the difference between what you earn and what you spend. You can do that by earning more — through freelancing or side hustles like dogsitting on Rover.com or renting out your car with Getaround — or by cutting back on spending in major areas such as housing, transportation and food.
How can I make saving automatic?
Writer and strategist Erika Sabalvoro treats saving like a bill to pay — billed by her future self to her current self. Many banks and credit unions offer automatic savings transfers, letting you move money on a schedule you choose. She started by putting aside $35 here and there and increased the amount as her circumstances changed, adding any leftover money at month’s end.
Where should I keep my emergency savings?
Most savings rates are low — the national average is just 0.09%. Picking a high-yield savings account with an annual percentage yield closer to 2% will help your balance grow faster. The article also recommends comparing accounts before opening one to find a bank or credit union that fits your needs.
How to Save $500 is a Billshark page. It can help you with your bills and your choices, and it can show you how to save.
Learn how to save $500 fast and start an emergency fund by shifting your mindset, growing the gap, and automating savings. Begin building yours today.
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Skipping your daily coffee isn’t going to cut it.
Here’s a hint: Skipping your daily coffee isn’t going to cut it.
