| Personal finance gurus love to talk about this, but | | | | less, looking at my prior post for more ideas on |
| the truth behind building an emergency savings | | | | savings, etc). |
| account is that it's unimaginably difficult for most | | | | Now, go back to our savings calculator and put in |
| anyone to do! But that shouldn't preclude you | | | | the total savings we need in the case of an |
| from actually doing it. | | | | emergency: |
| Why You Need to Start an Emergency Savings | | | | $2,800 x 6 months = $16,800, of which we would |
| Account... | | | | be able to shave off a year on a half, but six and |
| * You have others relying on you for support, like | | | | ½ years is still a long time. |
| children, a spouse or parents, who need your | | | | Thinking outside your box |
| consistent support. Imagine what life would be like | | | | Tell you what, let's be even "more realistic" and |
| without your support. | | | | say "If I need to, I can supplement most of my |
| * As the US economy poises for slower growth, | | | | income with a part time job or temp work after |
| you may want to rethink about job security. How | | | | 3 months, until I can turn things around." Let's |
| would you adapt if your company had layoffs | | | | now do the calculation for 3 months. |
| because of a slower economy? | | | | $2,800 x 3 months = $8,400, which we would |
| * Something on a personal scale happens to you | | | | only have to save for 3 years and 4 months, |
| or a loved one and you don't have the insurance | | | | which isn't long considering most of us work |
| to cover it. I know... you can get a bazillion types | | | | 30-40 years. |
| of insurance, and, lucky you, whatever happens is | | | | Not bad! We have now saved enough to cover |
| not covered. | | | | our expenses for a short time. And by having an |
| * You don't have the money at the end of the | | | | emergency savings account, you don't need to |
| week. This is often the case. It is easy to build a | | | | touch your retirement account. So when you |
| life around what you make. Try building a life | | | | eventually get an income back, you don't lose the |
| around only what you really, really need. | | | | continued growth in your retirement portfolio. |
| * Your belief system wires you to be | | | | Fixing the other side of the equation |
| impenetrable to anything. "Nothing can happen to | | | | Remember, an emergency account is for |
| me" or "I make too much money to worry about | | | | temporary emergencies. If you are facing or |
| that stuff." That is a huge risk to take. Look at | | | | expect to face a genuine long term emergency, |
| those around you and imagine who you know | | | | then you will need to consider tapping your 401(k) |
| that is having a tough time "making it." If it can | | | | and focus on improving your income. |
| happen to them, it can certainly happen to you. | | | | I highly recommend picking up a copy of What |
| So what if I start to save, how much should I | | | | Color is Your Parachute. This book helps to quickly |
| save? | | | | and efficiently identify ways to get your income |
| Many personal finance "experts" want you to | | | | back on track. Don't waste your time with |
| save 6 months salary after taxes. If you are | | | | traditional routes if they don't seem to |
| making $60,000 and you are in the 30% tax | | | | immediately work. |
| bracket, you should be saving: | | | | Also, don't be afraid or too proud to seek |
| $60,000 x .30 = $18,000 - $60,000 = $42,000 / | | | | assistance from others. I remember one of my |
| 12 months = $3,500 per month | | | | friends, who has Type I Diabetes. I begged her |
| $3,500 x 6 months = $21,000 | | | | for years to seek help through a government |
| Do you know how long it will take putting in $200 | | | | program. When she finally caved in, she found the |
| a month in a 3% savings account? | | | | care she received was no different than before. |
| 7 years, 10 months | | | | Unfortunately, she spent a bundle on medical |
| Ridiculous, huh!?! Now, you understand why no one | | | | expenses before getting to that point. Sometimes |
| wants to save for an emergency account. But | | | | we just need help from others. |
| that doesn't mean we shouldn't do this, especially | | | | Where do I begin? |
| for the reasons I mentioned above. We just have | | | | You can start by saving a small amount, like $200 |
| to be "more creative" about how much we would | | | | a month, directly deposited into a savings account |
| need in an emergency. | | | | at a different bank than you currently use, so |
| Solution: A financial emergency plan | | | | you are not tempted to use the money in |
| To do this, we are going to create a financial | | | | non-emergency situations (out of sight, out of |
| emergency plan, just like those fire drills you had | | | | mind!). |
| in grade school. Our objective is to accomplish a | | | | This account should be set up so your monthly |
| more realistic figure that would reflect tighter | | | | contribution is transacted automatically at the time |
| spending habits in a thrifty environment: | | | | you get paid. If you can't budget $200 a month |
| Step 1: Take 10 minutes and pull out your last 2-3 | | | | to start, arrange a smaller amount of $50 a |
| financial statements for all your accounts, including | | | | month and, in the mean time, look to cut |
| credit card, bank and/or brokerage statements - | | | | unnecessary expenses until you are able to |
| anywhere you have expenses. | | | | contribute more. Sometimes, actively heading into |
| Step 2: Look at each and every expense. | | | | the right direction is powerful enough to make a |
| Determine which ones are essential and which | | | | long term difference in your life. |
| ones are less than essential if you were stuck in | | | | You may want to use a financial comparison site, |
| an income emergency situation (buying "Tickle Me | | | | like Bank Rate, to determine the best rates for |
| Elmo" is not an emergency). | | | | CDs and Savings accounts. A higher rate can |
| Step 3: Calculate all your "essential" expenses. And | | | | shave months off your emergency fund. |
| presto, this is the true monthly figure you should | | | | Finally, start today. Don't wait. Get your bank |
| save for. So if you have been living off of that | | | | statements out, and make it happen. The sooner |
| $3500 after tax figure, you can now reduce that | | | | you get there, the sooner you enjoy a bit more |
| number to $2800 in an emergency (via eating out | | | | economic security. |