Is your savings account much smaller than you want it be?
Saving money might not come easily when you have other expenses to pay before you set aside money. But emergency fund savings are a critical part of a healthy financial plan. For most people, saving three to six months’ worth of monthly expenses is an ideal emergency fund amount.
If you’re starting fresh with an emergency fund account, you might want to set a goal of first saving $1,000 as a steppingstone to your total savings.
Learning how to save $1,000 in a year is easy, if you follow a few simple rules to establish healthy habits.
The three keys to saving $1,000 in a year are:
- Create a budget
- Reduce your spending
- Increase your income
- Establish a Separate Emergency Fund
You probably could have guessed that those are the three main ways to build a savings account with $1,000 to cover emergencies.
Let’s look in more detail at just how to do each step. By tweaking a few habits in your life, you may be able to easily save $1,000 without any major sacrifices.
How to Make a Monthly Budget
Making a monthly budget is critical to reaching your financial goals. A simple budget includes:
- Your income, including your salaried paychecks or income from investments
- Your expenses, including all monthly bills such as utilities, housing, groceries, phone service
Your cash flow is what is left when you subtract your expenses from your income.
If you have a negative cash flow, that means you are spending more than you are making – you are digging yourself into debt. In that case, financial advisors would recommend that you focus on cutting back expenses.
If you have a positive cash flow, then you have extra money each month to put toward a particular goal – like a goal to save $1,000 in the year.
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- How to Use an Emergency Fund Ratio for Budgeting
- Calculating Your Liquid Net Worth
Easy Ways to Cut Expenses
To cut back on what you spend, the first thing to do is list out what you spend. Be aware of whether you’re spending $5 a week on coffee or $25.
Write down all your expenses, big and small. This helps give you clear perspective on your spending habits.
1. Cook at home more
For many people, the number one way to cut expenses is with food. Eating out – even buying coffee on the go – can add up to a major expense quickly. Say, for example, a cup of coffee on the go cost $3.25, where it cost $0.25 per cup to make it at home.
If you bought coffee out twice a week and the rest at home then (assuming you had one cup of coffee everyday):
- Weekly cost: $7.75
- Monthly cost: $33.58
- Annual cost: $403
If you always made coffee at home and never bought out:
- Weekly cost: $1.75
- Monthly cost: $7.58
- Annual cost: $91
So, just by having coffee in instead of from a café twice a week, you could save more than $300 in a year. If you had coffee out four times a week and started drinking all of it from home, then you could save $600 in a year, and so on.
2. Review Your Entertainment: Cut the Cord
If you subscribe to cable television, chances are you could save a substantial amount of money by dropping it. You can rely on more affordable entertainment – and your choices are seemingly limitless. Netflix, Amazon, Prime and HBO are all among the providers offering more affordable streaming than you typically would pay for traditional cable.
- Monthly cost of cable: $60 to $80
- Annual cost of cable: $720 to $960
- Monthly cost of Netflix or Amazon Prime: $9 to $16
- Annual cost of Netflix or Amazon Prime: $108 to $192
The above costs are estimates, but you can see that just be switching your source of onscreen entertainment, you can save substantially – as much as to $850 per year!
3. Drive Less
If you own a car, using it less can save you money – from the cost of gas to maintenance costs.
Consider an example where you are driving a car daily that gets 25 miles per gallon, and gas costs $2.30 per gallon. If your daily commute was 50 miles roundtrip, then your costs just for gas would be:
- $23 per week
- $99.67 per month
- $1,196 per year
If instead you took mass transportation for $2.00 per day, your costs would be:
- $10 per week
- $43.33 per month
- $520 per year
The money you can save – $676 per year – may not be the full $1,000 you want to save in a year for an emergency fund. But it can help reduce your overall costs and help you toward your goal.
4. Browse Discount and Thrift Stores
Saving money on clothes is another easy way to cut back your annual costs. Retailers are notorious for marking up their items significantly – with an average of about a 40% markup.
You can save money on clothes in a number of ways. Of course, you can simply buy less.
To keep up your normal clothes-buying habits without scrimping your style, you can also shop at discount retailers like T.J. Maxx or Marshall’s that offer higher quality clothes at a discounted price. You may have to spend a little more time finding what you need in these stores, but the savings can be substantial.
Second-hand thrift stores also have often have some gems that can spice up a wardrobe for much less than the cost of buying new. Again, you’ll have to shop around a little longer, but the discounts are very high compared to what you would pay for a new item.
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Ways to Make Money on the Side
As you cut back expenses, you can also improve your cash flow by increasing what you earn.
The best way to do that depends on your situation, of course. But adding a “side hustle” to your schedule is one way to earn more money toward a goal to save $1,000 in a year.
Some examples of side hustles you could do in your spare time:
- Refurbish and flip furniture
- Start a blog, podcast or YouTube channel
- Get a part-time job
- Start a dog-walking business
- Freelance your skills on sites like Fiverr
- Offer tutoring services
You could also try use money-making apps, which give you some returns as you shop. However, the money you can make from these apps don’t provide a lot of cash.
Where to Put an Emergency Fund
Once you have the positive cash flow you need to set aside for a $1,000 emergency fund, you need to find a place to put it.
Of course, you could just stash the cash in an envelope in a safe place in your home. However, you do have other options – and some of them can help you earn money. They can also provide a more secure place for your money.
If you invest $1,000, you may be able to grow your savings. You can invest in a number of ways, depending on factors like your risk tolerance.
With an emergency savings, you might want to consider more conservative investments like bonds or savings accounts. That way, you can be more secure that you won’t lose your money. With accounts held at financial institutions, you can also enjoy the protection of your assets, because by law they are insured up to a certain amount ($250,000 for a typical savings account is insured by the FDIC).
You could invest in riskier investments like stocks, however keep in mind that you also take on more risk. If the market tanks, you could lose your $1,000.
The Bottom Line
Learning how to save $1,000 in a year is very doable. Review your options and, as you go about your life, look for small ways you can either cut back some expenses or increase your income.
In the long-run, small additions to your cash flow can really add up and help you achieve your financial goals.