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How to set up an emergency savings account

Welcome to Fix My Finances, Yahoo Finance’s new personal finance series. Each episode, we take a look at one viewer’s financial state of affairs and offer advice, insight and information on a variety of issues, including how to save more, spend less and pay off lingering debt.

In this episode, we meet Athena, a 27-year-old from Brooklyn, NY, who has a pretty awesome perk at her job. She works for a university that provides her with free housing. In New York City, not paying rent is basically like winning the lottery. Athena’s concern is that if something unexpected were to happen, she doesn’t have an emergency fund.

Athena says she sets out to save an ambitious $1,000 a month but ends up dipping into it each month, leaving her with little actually saved.

There are clear ways that Athena needs to curb on her spending, like eating out less and going to fewer concerts and shows. However, spending less isn’t the only key to putting an end to her savings problem.

One way to boost savings is to open an online bank account and set up automatic electronic transfers to the account each month. Next, instead of trying to save $1,000 a month, Athena should drop it down to a leaner, more achievable $850. Over time, she can try to bump up the amount she’s saving each month by $100. So that it’s difficult to dip into the account, Athena shouldn’t get a debit card or checks for the account.

Of course, in order to increase her savings, Athena will have to earn more or take the money from somewhere else. Athena told us she pays more than the minimum payment on her student loans, which incur 5% interest. We suggested she drop down to the minimum monthly payment. This may take Athena longer to pay off the loan, but it will free up money for her emergency fund.

Another awesome perk of Athena’s job is that her university contributes to her 403(b) retirement plan. That’s great, but Athena should also consider opening an additional retirement account, such as a Roth IRA. This will help her invest for long-term growth. She’ll pay taxes on her Roth IRA contributions up front, so Athena can withdraw money—tax and penalty free—at any time if she were to need it for an emergency.

Want to be a part of this new series? We are looking for people in their 20s and 30s who need a money makeover.  Apply here.