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Financial Literacy - Emergency fund
Jean Chatzky
Take baby steps to build a sizable emergency fund, says this personal finance expert.
Creating an emergency fund

Interview: Jean Chatzky

Those living paycheck to paycheck may feel that they don't have any money leftover that they could set aside. How can they get started?

Make financial goals tangible

The trick is to reverse the process. People think that they don't have any money leftover that they can save. You have to save first and then work with whatever you have left to live. So, the savings process has to begin when you get the paycheck. That's when you set up the automatic transfer that moves a bit of money from your checking account to your savings account and gets it out of the way of your fingers, where you're likely to spend it.

The first month when you have moved that $50 that you ordinarily would have in your spending account may be a little bit difficult. But the next time you do it with that second paycheck, it's not going to be as tough, and by the third time around, you may feel inspired to make the initial transfer a little bit fatter. If you think about it in reverse, every time you get a raise, it feels like you've got a whole bunch of extra money. That feeling only lasts for one or two paychecks, however, and then you start wondering how you ever lived on less. You're just reversing that process.

The same advice applies toward taking the extra money from raises.

Right, absolutely. Well, that's easy. What stands in the way is that people feel like they deserve some sort of a splurge from that raise. My feeling is OK, give yourself some sort of small splurge, but don't go through all of it, don't blow your chance at a real safety net.

Don't blow your chance at a real safety net.

But isn't there another barrier to the savings strategy -- people don't want to feel deprived by denying themselves everyday pleasures?

They may be disappointed when they don't get one of those everyday pleasures or extra pleasures. But guess what, research has shown that that disappointment doesn't last as long as we think it will. We have -- and I'm citing research that comes from Dan Gilbert out of Harvard -- immune systems in our psyches, much like we have immune systems in our bodies. And when we are disappointed, either because some guy breaks up with us, or because we have to drink a regular coffee and not a double decaf mochaccino -- we get over it very, very quickly.

-- Posted: July 23, 2007
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