Seven Small Steps to Big Savings

Living without an emergency fund is like sailing on a cruise ship that's not equipped with a life boat. You experience smooth sailing until rough waters imperil the ship -- and then you have few options.

If you don't have an emergency fund, it means your threshold for risk is set dangerously high -- to a point where normal events can become emergencies. Have you ever felt uneasy because you weren't sure you had enough money in your checking account to cover the checks you wrote?

What if you had a different "set point"? What if you started to feel uncomfortable when your reserve funds fell to $10,000? That's the difference between living paycheck to paycheck and having a wealth mentality.

You may believe you don't have extra savings set aside because you don't make enough money or you've had a run of bad luck. Or maybe you think you'll save after you get out of debt. It might be counterintuitive, but unless you start saving regularly, that day may never come.

Certified Financial Planner Bedda D'Angelo of Fiduciary Solutions in Durham, N.C., uses a wealth-mentality approach with her clients so they transition from dependence on paychecks to independent wealth. It all starts with emergency savings.

Follow D'Angelo's tips to facilitate the mental adjustment you'll need to shift from lack to abundance.

1. Focus on your progress. D'Angelo's clients are often initially embarrassed when asked about their goals because they don't see the progress they've already made.

"When people don't have an emergency fund, it's because they don't focus on what they own; they focus on what they owe," says D'Angelo. Maybe you have college loans or credit card debt, but set that aside for now and start with what you do have and build from there. You can't build from debt.

D'Angelo discovered that people take little note of their assets when they are focused on what they don't have. "I'll ask (clients) for paperwork and they leave out their 401(k). They may own a lot in Florida but they don't think of it as property. It's always a shock to them to see that they own anything."

For this reason she asks clients to give her their 401(k) balances every month because it helps them see their progress.

2. Use bigger bills to think big
D'Angelo's next trick for facilitating the mental shift requires a quick trip to the bank. Get a $100 bill and keep it in your wallet with your other money. When your smaller bills dwindle to nothing, take a moment and say: "I'm down to my last hundred." When you finally need to break and spend it, it feels better than getting down to your last buck. It's about resetting your mental focus.

3. Start saving on autopilot
Some people won't do anything for themselves, but will focus on their children. If this is you, start by setting up a 529 plan for college savings. At the same time arrange to contribute to your company 401(k) plan. No, that's not emergency savings, but it still will help change your focus and build wealth. Plus you won't feel the pinch of 401(k) money because you're saving pretax dollars.

Once that's rolling smoothly, figure out how you can maximize your 401(k) contributions. For example, if you receive a tax refund every year, adjust your withholding and put that extra money in your 401(k) plan so that you, rather than Uncle Sam, can earn dividends and income on your money.

The truth is, if need be you can tap 401(k) money in an emergency. Tuck money away here before putting it in a traditional passbook savings account. Because it's not as liquid as a bank account, you won't be as tempted to touch it.

4. Open a brokerage account
Here's where D'Angelo's approach really diverges from the norm: Open an account at a discount brokerage firm, then go to your employer and have a portion of your pay directed to that account. Start with a money market mutual fund. When you get together the first $1,000, purchase a no-load stock mutual fund, such as one that mimics the Standard & Poor's 500.

Planners are taught to instruct people to first accumulate money in an emergency fund and then invest, says D'Angelo. But often the emergency fund never gets started or simply doesn't grow because it's too accessible. "People without emergency funds tend to live in debt and paycheck to paycheck. You've got to initiate change somewhere."

Why not set up your emergency fund in a brokerage account, which offers tons of investment options, instead of a bank where interest earnings generate yawns rather than excitement?
Next, track your growing assets in Excel or on a legal pad each month to stay focused on how much you own and how much you owe. Before you know it, your focus will switch from lack to abundance.

In a dire emergency, such as when you lose a job, you can always sell mutual fund shares or stocks to cover costs. "Is that ideal?" D'Angelo asks. "No, but keeping the money tied up with strings like that will discourage you from dipping in except for when it's truly needed."

This prevents you from liquidating the brokerage account when the next shiny object or unplanned expense comes along.

5. Save for something specific
Having a positive goal to work toward can be a powerful motivator for saving. D'Angelo gives the example of a young couple she worked with. They planned to marry and were committed to buying a house. Instead of telling them to give up eating out and going to Starbucks, D'Angelo showed them how they could save for a modest down payment. "When you can see that there's a possibility to get a house down payment -- that's a powerful encouragement, so they were willing to go through Draconian changes to get there."

The couple was motivated by their desire for a house. Once you see how you can afford to fund your dreams, it sweetens the medicine, so you'll want to save rather than feeling deprived. It's the inspirational equivalent of saving for vacation instead of a root canal.

"Once they've bought a house, then Banana Republic and J. Crew won't cut it anymore. They can achieve dreams, not just goals," D'Angelo says.

6. Raise the ante
Looking for extra money in your budget can seem like a fruitless game of hide and seek. But the money may be hiding in plain sight, says D'Angelo. "People make more than they see, but never focus on it," she says.

One trick for finding money is to make a list. On the left, log what you are currently spending; on the right, put down what you want to buy. When you do this on a line-item basis, it's easier to see where you can make adjustments. It's important to tackle each change piece by piece, rather than trying to do it all at once.

D'Angelo prescribes building $1,000 first in a brokerage account to get the knack of saving, then work on building and keeping cash reserves by saving $1,000 in passbook savings, then $1,000 in checking. Every time the passbook gets to $1,000 she has clients move the money to a tax-free money market mutual fund. D'Angelo says the idea is to start several little accounts and feed them until they become a big account in aggregate.

Once you get on track, raise the ante. Pretty soon, you'll have funded one month's worth of living expenses, next two, then three.

7. Take it one step at a time
The only practical way to make this mind-set stick is by integrating the steps into your life one at a time. Unless you're doing it in baby steps, you're not retraining the brain, says D'Angelo. Trying to leapfrog forward to the end of a lesson is like doing homework without reading the textbook or going to class. It's the same with managing money. You don't have to do everything all at once, but you do have to start someplace.

When you see your investment portfolio increase in value faster than a cash investment, you'll have a "hosanna moment," as D'Angelo calls it, and get into the saving mind-set.

Bankrate.com is the Web's leading aggregator of information on financial products including mortgages, credit cards, new and used automobile loans, money market accounts, certificates of deposit, checking and ATM fees, home equity loans and online banking fees. Visit Bankrate.com to get the tools and information that can help you make the best financial decisions.