A few years back, I got a paycheck in the mail and went to deposit it. I left the bank, dropped off a rent check, bought groceries, a sandwich across the street, gas on the way home, and a new album from iTunes to listen to while cooking.
I forgot to endorse the check. Normally, this is no big deal for my bank. That day, they decided it was. Originally, they cashed the check, the money went through and popped up on my online banking sheet. Then someone else caught the check down the line and didn't like that it wasn't signed. They took the money out of my account, stamped the check to be returned, and sent it back to me for endorsement.
Here's the thing: I didn't have any other money in the bank.
The cost of one missed signature
Because I forgot to sign the back of my paycheck, I incurred the following fees:
- $100 for rent. That rent check bounced. $50 for the bounced check from my management company. $50 late fee for that month.
- $35 overdraft fee for groceries. I bought $27 worth of groceries.
- $35 overdraft fee for the sandwich.
- $35 overdraft fee for gas. I drive a scooter and can hold about a gallon in my tank. Gas was less than $2.50 per gallon.
- $35 overdraft fee for the iTunes album.
That's a grand total of $240 in charges and overdraft fees.
I spent less than $50 on food, gas, and an album, and it cost me an additional $140 in overdraft fees. Later I found out that's the maximum for one day, so there is some pity in the world. I didn't need that sandwich — why didn't they just reject my card?! They explained to me that it's because I never told them to do so. As to whether or not that's all criminal or how to effectively talk your way out of overdraft fees, that's another subject. Neither of those fixed the larger problem: I needed to change my habits.
I was living paycheck-to-paycheck and really had no reason for it. I wasn't in debt. I made enough money for me. Yet somehow at the end of each month during those last few days before payday, I always ended up eating a lot of rice. So what did I do when I had $240 in late fees to pay? I paid them. I didn't max out a credit card. I found $240 in my budget (and I use budget in the sense that everyone on earth has a budget, not that I'd ever sat down and actually made a budget or looked at budgeting) and still ended up with the same result at the end of the month: rice on the stove.
It occurred to me that if I could put $240 aside one month for bank fees, I could probably do it another month for savings.
To start my emergency fund, I cut back on several things I normally would have purchased, such as the following:
- A plane ticket to New York to visit my college roommate
- Mountains of books
- An über fancy date with my girlfriend
- Two months unlimited yoga at that swanky new studio
- The NFL Sunday Ticket package from DIRECTV
- A trip to IKEA for random non-essentials (New champagne flutes? Yes, please. Lingerberry juice concentrate for all! Yes, I should buy a new pillow. This faux leather chair is only $75! With NFL Sunday Ticket, I would pretty much need it.)
Nope, no plane tickets. I finished a book or two off my shelf. No swanky dates, just a pot of specially seasoned beans (and she loved me all the more). I waited for a friend to get me in on her pass to the new yoga studio. I went over to a friend's house for the Bears game, and yeah, I guess I bought a six pack. And look, I lived without the chair!
Two or three months in, I had a decent stash saved. This was the start of my emergency fund.
Why set up an emergency fund?
Most GRS readers understand the importance of an emergency fund, but for someone starting out, it's not always clear how often a cash cushion will come in handy. The following are some reasons I've used mine:
- I moved into a new apartment. I needed to pay one deposit before I got my last one back.
- My ear was clogged and I couldn't hear. I tried the over-the-counter stuff and it made it worse. After 10 minutes at the doctor's office, I could hear again. Initial visit cost me $85 plus $10 for the gunk they used.
- I was tired of fishtailing every time I rode my scooter in the rain. After getting yet another flat, I swapped out the Chinese-made tire the bike came with and got the super-tread ones. I haven't fishtailed since.
- I only get paid once a month, and sometimes things come up right before the next paycheck. When I first started saving, it got me over that rice-eating hump at the end of each pay cycle.
I think those were valid reasons to use my savings. Just for fun, here were some reasons I have not used my emergency savings account:
- My friend wanted me to go to a Josh Groban concert.
- Two of my high school friends were getting married. They registered at Neiman Marcus.
- NFL Sunday Ticket.
- It's getting cold at night. I want a car.
Putting together an initial emergency fund can be incredibly challenging. The first step is always the hardest. Bank fees spurred me into action. Others start with their tax refund. Some start small, some big. Just $50 in my account would have been enough to avoid those bank fees. Forget the excuses and start however you can. Track your spending – on your credit cards and everywhere else – for a month and give more consideration to what isn't necessary, then put that into a high yield savings account. Stash your holiday bonus into savings. Sell some things online or to a local clothing store. Get a roommate. Take on a small second job or even look for seasonal work.
Before you start worrying about how much you need to set aside or what your future financial goals should be, before you rule out buying a house or going on that dream trip you've always wanted to take, start your emergency fund. Paycheck-to-paycheck isn't the only option. Setting some money aside, whatever you can manage, is your first step. Do it today!
How did you first get started saving? What was your turning point?