How to Save Your First $1,000 for a Starter Emergency Fund
Ten years ago we had a negative 6-figure net worth. We owed $120,000 to various banks, couldn’t afford a home, and were constantly broke.
Today we have a positive 6-figure net worth and are in a much better place with our money. The first step in turning our finances around was saving $1,000.
How was saving $1000 the stepping stone to our financial success? And why is getting into the habit of saving money important? Our goal with this blog is to answer those questions, and lay out some basic steps you can take to get yourself organized and in a place to start saving money, just like we did.
In our opinion, it’s the money that you keep that gives you options for the future, not necessarily the money that you make (although that is important too). It’s the money you keep that you can grow more and more. Not the money lost.
Think of it this way:
Someone who earns $10 million/year but spends all of it (not on assets in this example) is at the exact same place financially at the end of the year as someone who earns $10/year and also spends all of it. These two people would probably have dramatically different lifestyles, but at the end of the year their balance sheets read the exact same number: ZERO. They’re both broke. There’s nothing left to grow. There’s nothing left for an emergency.
You want to be in a place with your finances where you have some peace of mind that there’s money set aside in case of an emergency, and that there’s also money left over you can grow into more money without having to actively work for it.
Here’s something else you may want to think about: if you invest $1,000 all at once into the stock market, and then invest $1,000 per year for 40 years after that (at the S&P 500’s average rate of return), you’ll have over $680,000 by the time you’re done.
So let’s get into how to save that first $1,000.
Step 1: Determine Your “Money in”
How much are you earning every month?
This number is very important because this is your baseline and how much money you have to work with every month. You’ll need to know this number so you don’t spend more than what you’re earning.
Do you work for someone else and get a paycheck?
If so, how much is it? You may already have an idea. This should be pretty easy to figure out by logging into your bank account and looking at previous paycheck deposits.
If you are unable to find this for whatever reason, you can always get a copy of your paystub from your workplace.
Do you work for yourself?
If so, you should already know how much you earn since you have to keep track of it for taxes. Look through your accounting software and create a profit-loss statement for the last six months to a year, and then take a monthly average of your net income over that same time period.
For example, if your net income over the last 6 months was $12,000, your average monthly income is $2,000.
Step 2: Determine Your “Money out”
This is how much money leaves your bank account every month. How much you’re spending. For example, your: rent/mortgage, groceries, utilities, eating out, etc.
Money out can be broken up into two categories:
Things you need to spend money on.
Things you don’t.
Make a list of EVERYTHING you spend money on each month, and separate them into those two categories. For example:
Needs:
Rent
Utilities
Food
Gasoline
Car repairs
Wants:
Starbucks or McDonald’s for breakfast.
Updated model of a gadget you already have.
A road trip to the beach.
A $3,000 dinner with friends where you play credit card roulette at the end to see who picks up the bill.
You can track your spending in two ways:
Looking back and auditing all of your transactions for the last few months.
Keeping track of everything you spend for the next 30 days.
We’d recommend doing both, even though it will be more work, because it gives you the most accurate picture of how you’re spending your money.
What you can do next is organize everything in a budget type format like we have here. This is how we organize all of our monthly expenses. You can watch our monthly budget videos as well if you want more specifics on that.
Step 3: Cut Expenses & Raise Income, if Needed
There could be different scenarios playing out in this step depending on your individual circumstances. Analyze your money-in and money-out:
You’re spending LESS money than you’re making every month.
Congratulations, you’re in the green and we’ll talk about what to do next in the next step.
You’re spending MORE than you’re earning every month.
We would recommend, at least at first, cutting out everything you don’t need to spend money on (the “wants”). If that’s too extreme, how many unnecessary expenses can you cut out of your life and get to a place where you have money left over to save every month? Cut those out.
You’re spending more than you’re earning on your “needs.”
Ask yourself if everything you listed as a “need” is actually a “need”? If not, cut out whatever you can. If your needs legitimately cost more than you’re earning every month, it may be time to make some decisions.
Do you need to move to a cheaper location?
Can you ask for a raise?
Can you get a side hustle or second job to make more money?
Can you get a different, higher paying job entirely?
Step 4: Save Every Last Dollar You Can in a Savings Account and DON’T TOUCH IT unless needed for an emergency.
The key phrase here being, “don’t touch it.” Whatever is left over after all your expenses are paid for, put that amount of money into your savings account.
It helps if this is done first before you pay for anything else. That way the first place your money goes every month is to yourself.
You can then calculate how long it will take to save $1,000.
For example, if you’re earning $500 more than you’re spending every month, it will take two months to save $1,000. You can always cut out expenses and/or increase your income if you want to speed things up.
This will be the glorious beginning of financial freedom.
Going through this process kick started our financial literacy, discipline, and allowed us to create a better financial future. We hope this helps you in your financial journey.