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How to Save for Emergencies, Big Purchases and Retirement

We all know we should be saving money, but why don’t we actually do it?

Back in the day, your grandma saved her money in a coffee can and put it on a shelf in the kitchen—or some variation of that method. It gave her quick access in an emergency, but it was stored away from the regular cash so it wouldn’t get spent on a whim.

Nowadays, most people don’t save their money in a coffee can. The sad part is, most Americans aren’t saving at all. Only 41% of us could use our savings to pay for an emergency.(1Sure, life is a little more complicated than it was back then, but we should all be able to set aside a little cash to cover a basic emergency.

So how do you build up your savings account—and your future? Here’s a quick rundown:

  1. Build your emergency fund first.
  2. Put away savings before you spend.
  3. Plan for big expenses and trips.
  4. Don’t touch your retirement savings.
  5. Keep savings separate from checking.

If you follow these five suggestions, you’ll not only be able to pay for that emergency trip to the vet, but you’ll also be able to save money for your retirement. Let’s dive in!

Build Your Emergency Fund First

Before you save money for anything, whether it’s a down payment for a home or a trip to Alaska, you need to get an emergency fund in place. If you still have debt, start by saving $1,000 as quickly as you can. Then, pay off any outstanding debt. When those two things are taken care of, you can start building your emergency savings.

Now, we’re not talking about having $500 in the bank to cover a busted water heater. You need to save at least three to six months of expenses in your emergency fund. Why so much money? Because you need to be prepared in case something happens to you and you can’t work for several months. Or in case you lose your job unexpectedly. That fund will allow you to keep the household running, the mortgage payment up to date, and the lights on.

You might be thinking, That’s not going to happen to me. My job is secure, and my health is great. I don’t need to save that much. But sadly, a lot of people with that mindset end up trying to dig out from a mound of bills and payments later. They can’t save up money for their retirement years because they’re trying to get back on solid financial ground.

Take John and Cindy for example. He’s a police officer, and she’s a hair stylist. They have two kids, ages 16 and 13. They still owe a mortgage on their house, but they’ve been investing regularly to stay on track for retirement. Things were going great, but then John was injured while waterskiing with friends. He was unable to work for four months, and Cindy’s salary couldn’t cover their expenses even though she took on more clients. As a result, the two of them got behind on their mortgage payments. Now they’re in a financial hole and they have to stop investing in order to get caught up on their bills.

Imagine how differently John and Cindy would feel if they had put that emergency fund in place. Or, to bring it closer to home, imagine how much better you’d sleep at night if you knew you could lose your job tomorrow but still provide for your family.

Now you know why having an emergency fund stocked with three to six months of expenses is important. If you haven’t completed this step, then it’s your first goal.

Put Away Savings Before You Spend

If you’re serious about winning with money, you have to make saving a priority—not the last thing you do when everything else is paid for. In order to do that, you need to create a monthly budget that includes a line item for savings. If you’ve created a monthly budget and you don’t have savings included in it, then you need to cut back on some extras so you can save for future expenses (like vacation, furniture, car replacement, etc.). If you don’t prioritize and budget for savings, you’ll never have anything in savings—and that’s not good.


How much will you need for retirement? Find out with this free tool!

In addition to saving for future expenses, you need to put away money for retirement. Once you’re debt-free except for the mortgage and have that emergency fund in place, you need to put away 15% of your income in an investment account—most likely a 401(k) through your employer. If that’s not an option, you can put it in an IRA (go for Roth instead of traditional whenever possible).

Feel like you don’t even know where to start when it comes to investing? We get it. There are lots of banks and paperwork and financial jargon that can make you feel clueless. If you’re feeling that way, find someone you trust who will sit down with you and coach you on your finances. If you don’t have anyone in mind, we recommend finding a SmartVestor Pro in your area. These are financial advisors who believe in the same investing principles that we do here at Ramsey Solutions.

Plan for Big Expenses and Trips

Saving for the future while also living in the present moment is a juggling act. You want to enjoy your life now and save for later. So how can you do those things on your bucket list now without hurting your retirement fund? You save up for them.

Let’s say you want to take a trip to Ireland. You’ve done your research and have created this budget:

Airfare: $1,000

Car Rental: $500

Gas: $300

Lodging: $750

Meals: $300

Sight-seeing: $300

Extras: $350

Total: $3,500

$3,500 divide by 10 = $350/month$3,500 divided by 18 = $200/month

Let’s look at your timeline. If you want to take that trip a year from now, you divide that $3,500 by 12 and put that amount away each month—roughly $300. If that $300 would sabotage your regular monthly budget, you have three options: You can trim the trip budget, you can work extra jobs, or you can lengthen the amount of time you’ll save. For instance, if you decide you want to go on your trip in 18 months instead, you’d need to put away about $200 a month.

See, you can go on that trip you’ve always dreamed about! It just takes patience and focus. Will you be able to travel the world at the drop of a hat? No—but neither can 99% of the population. The media and credit card companies just make it look like everybody can! They make you worry about missing out so you’ll take out that plastic card and enslave yourself to debt. Don’t fall for their trap!

What if you want to save for a wedding? Or a motorcycle? Or an addition to your home? Follow the same principles. Estimate your cost and divide that amount up by the number of months you have until the purchase. The process is easy. (It’s being patient that’s hard.)

Don’t Touch Your Retirement Savings

Once you start saving for retirement, you’ll be tempted to take money out of your investments to pay for big items. Let’s look at another example: Alex’s story. When he was just starting out in his career, he opened a 401(k) because his boss told him it was important. Over time, he built up some money in that account. Fast-forward a few years. He and his wife were moving, and they decided they really needed some furniture for our new house. They didn’t have enough cash for such a big expense, so Alex went to the one place he knew he could get some money quick: his 401(k). Yikes.

He withdrew $20,000 from that account, and it quickly became $10,000 after paying penalties and taxes. So basically, he threw away $10,000 in order to use the other $10,000. If he had left that $20,000 alone until age 65, it could have grown to over $560,000. And now, he probably doesn’t even remember what that furniture looked like!

The lesson: Leave your investments alone until it’s time to retire. If you take money out before then, you’ll not only be hit with huge taxes and penalties, but you’ll also rob your future self of money you may need.

Keep Savings Separate From Checking

One question people often ask is: Where do I put the money I’m saving? Great question. For your emergency fund, we recommend opening a simple money market account that offers basic privileges like check-writing and ATM access. No, this kind of account won’t pay a great interest rate, but that’s okay. You’re looking for easy access to money in an emergency. If you have the money in a CD (certificate of deposit), you may have to wait a few days to get the money—paperwork and all that junk. Plus, you’d have to pay a fee for cashing in the CD early.

Hopefully this article helped you understand what you need to do to sock away some money in the bank. In short, the only way to build wealth is to spend less than you earn and to save or invest the rest for the future. We’ve created a free Investment and Retirement Calculator to help you know how much you need to invest each month in order to have enough for your golden years.

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This article provides general guidelines about investing topics. Your situation may be unique. If you have questions, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros. 

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About the author


Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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