How to build savings habits even when money is tight

Standard financial advice tells us it’s sensible to have at least three months’ worth of living expenses saved in an emergency fund. It means we are better prepared to deal with a job loss, health emergency or unexpected expense, such as house or vehicle repairs, an unplanned overseas trip to deal with a family crisis or even a big vet bill.

But for many people, putting this money aside seems impossible when they are coping with rising living costs and static income as cash-strapped employers struggle to increase wages. Others are dealing with changes in circumstances such as children needing more financial support or a desire to cut back on work as they age.

As part of our series on money this month, we are looking at how to calculate the emergency fund you need and some tips on kick-starting savings habits.

How do I calculate how much money I need in my emergency fund?

Ideally you want enough money to cover your living expenses for three to six months. If you are a single-income household, have high levels of debt or are self-employed with no access to holiday or sick leave, your savings safety net might need to be bigger than those in dual-income households, people with low levels of debt or those with stable jobs.

Rather than basing your savings target on your gross income, audit your actual monthly outgoings.

Track the essentials such as monthly rent/mortgage, groceries, power, essential insurance, transport (petrol or bus and train fares), and minimum loan payments. Strip out luxuries or nice-to-haves such as eating out, holidays, streaming services, and other non-essential spending. Then multiply your essential monthly expenditure by the number of months you want your emergency fund to cover.

If your baseline monthly expenditure is $4,000, you need to save $12,000 to have a three-month safety net or $24,000 to cover your family for six months.  

Make saving a habit

Once you know how much you need to save, it can feel overwhelming. But avoid the temptation to stick your head in the sand and ignore the problem. Instead try some of these practical tips for slowly building up a savings safety net.

·      Start small — $5 or $10 a week is a great way to establish a habit and you can increase the amount as you are able. Watching your savings grow will help motivate you to stick at it.

·      Pay yourself first rather than saving whatever happens to be left at the end of the week. Set up an automatic transfer for payday so the decision is made and the money is set aside before you even see it.

·      Have a separate savings account, preferably one you don't see every time you check your everyday account.

·      Give the savings a purpose — emergency fund, holiday, Christmas, car repairs — rather than just “savings”. A clear goal will keep you on track.

·      Use windfalls differently: put some of your tax refunds, bonuses or things sold on Trade Me straight into savings.

·      Increase savings in tiny increments. If $10 a week becomes comfortable, make it $12 or $15. If you get a pay rise, use some of that to increase your savings amount rather than allowing all of it to disappear into increased spending.

·      Try something like ASB Bank’s Save the Change feature. It rounds up EFTPOS, Visa Debit, and electronic payments to the nearest $1, $2, $5, or $10, moving the difference into a savings account. It builds micro-savings passively with every swipe.

·      Track progress because watching $100 become $250 and then $500 can be surprisingly motivating.

·      If you have a bad week or need to raid the account, don’t feel like you have failed. The fund is there for emergencies so if the fridge stops working or you suddenly need to find $1,000 to pay an insurance excess, take what you need and reset. You will be surprised how fast your savings build up following a setback.

Building a savings safety net takes time, but starting small and saving regularly can turn even a few dollars a week into something that gives you valuable breathing room when the unexpected happens.